The U.S. economy is improving, but it’s still sluggish from a historical perspective. First-quarter gross domestic product grew at a 1.1% annualized rate. Consumer spending remains weak and has been a drag on growth for most of the year.

That said, the economy is driven as much by investment as by consumption. After all, we all have to produce in order to consume. Investment drives production. Residential investment has been a key driver of economic growth for the past two years. In fact, residential investment is estimated to have added a half percentage point to GDP growth in the first quarter.

Home sales – both new and existing – have been up most of the year. Price appreciation continues unabated in lower-end homes in many markets, though the overall trend in price appreciation is moderating. Case-Shiller's 20-city index shows prices year over year were up 5.4% compared to last year when they were up 6%.

We favor moderating price appreciation.  Prices at the national level should really appreciate at a percentage point or two above consumer-price inflation.  Yes, real estate wealth will accumulate at a slower pace, but at the same time sales activity will increase.

Homeowners want higher prices and home seekers want lower prices.  Prices appreciating at a rate closer to consumer-price inflation provides a nice equilibrium. We’re getting closer to a nice equilibrium that’s also a sustainable equilibrium.

Information provided by Jessica Regan.

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