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Big Boom Theory Is the housing market stealing away high-tech dollars?

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During the dotcom boom of the late 1990s, investors couldn'tget enough of the high-tech stock sector. That is, until the bottomfell out. Since then, investors have been flocking to the red-hothousing market. But while homeownership has hit record levels,high-tech innovation may be suffering in its wake.

"In the late '90s, the economy was being propelled by aonce- or twice-in-a-lifetime surge in investment in hightechnology," says economist Marshall J. Vest, director of theEconomic and Business Research Center at the University of Arizonain Tucson. "Of course, investment in high technology improvesproductivity, wages, the standard of living--there's a bigpayback when you invest in technology. [In] the past few years, theeconomy [has been] driven by investment in real estate. While moneyhas been flowing into real estate, it has not been flowing into thekinds of investments businesses undertake to make themselves moreproductive."

Meanwhile, a couple of financial incentives are helping driveinvestment dollars away from stocks and into real estate. A keychange in tax law, which took effect in July 1997, made real estateinvestment more attractive by allowing home sellers to keep,tax-free, capital gains of up to $500,000 per couple and $250,000for single tax filers. What's more, home buyers can deductinterest paid on mortgage loans that total up to $1 million to buy,build or improve a principal residence plus a second home.

Financial enticements alone, however, aren't responsible forthe investment trend. "There's always motivation toidentify what the hot new investment is," Vest says."Recently, it's been residential real estate. In the late'80s, it was farmland. In the late '90s, of course, it washigh-tech stocks. At some point, [investors] will decidethere's some other [area] where money can been made."

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