Wednesday, November 19, 2008

Why Housing Drags down Stocks

The housing crash is one of the fundamentals our economy inherits from the past. This is boom time for the nonresidential sector because, after a long wait, the housing sector no longer absorbs so many resources. If you are young with new business ideas -- good news: you no longer have to compete with the housing sector for funding.

Although business capital and GDP will grow (my detailed predictions are here), old capital has to compete with the new projects. That's part of why the stock market falls when we learn that housing investment is lower than expected. The chart below is from my NBER wp "Market Responses to the Panic of 2008" showing how housing investment appears to discourage non-residential investment.

No comments: