Housing Prices Continue To Recover, But Business Investment Still Sluggish

Includes: DRN, IYR, SRS, URE, VNQ
by: Calafia Beach Pundit

The Case-Shiller housing price index, shown in the chart above, may not be a perfect measure of housing prices, but it's probably the best one we have. The data for November, released today, is several months old, but it shows an ongoing recovery that is fairly impressive. From their peak in April, 2006, housing prices on average fell by 34%. Since hitting bottom in early 2012, prices have risen by almost 21%. Put another way, in the past two years prices have recovered about 40% of what they lost as a result of the Great Housing Market Collapse. It's likely that the housing recovery is now taking a breather, with prices rising at a much slower rate, thanks to higher mortgage rates and fears of tapering, but there is no reason to think that the recovery has been or will be aborted.

December capital goods orders, on the other hand, were somewhat disappointing. As the chart above shows, they have been relatively flat for the past year, and have yet to reach convincing new highs. This, in spite of the fact that corporate profits have more than tripled since 2000, and are up fully 70% from their pre-recession level. Without more aggressive investment on the part of business, the U.S. economy is unlikely to meaningfully narrow the roughly 10% "gap" between its current size and its long-term trend potential (see chart below).

Business investment is unlikely to improve significantly unless and until policies become more investment- and growth-friendly. Personal and corporate income tax rates are very high, regulatory burdens are very high (e.g., Obamacare and Dodd-Frank), and monetary policy uncertainty is unprecedented (e.g., will tapering continue, and if so, does it pose a risk to the recovery? or will tapering be delayed, thus posing other potential risks down the line?).

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