Abstract
There are a slew of factors that affect interest rates. A common belief is that the movement of the 10-year Treasury bond yield is the best indicator of the future level of mortgage rates. The mortgage rate is undoubtedly one of the most important factors that affect affordability of housing. On the demand side, it affects the availability of mortgage loans to potential home buyers. Although information on mortgage interest rates is becoming more available, it still is not as easily available as information on bond yields. During the recent, sub-prime loan induced financial crisis, the government intervened extensively in the bond and mortgage markets through various quantitative easing (QE) mechanisms, both directly and indirectly. In this paper, we estimate the extent of the impact of these government policies on the relationship between bond yields and mortgage rates. Our results show that QE policies indeed distorted this relationship.
Highlights
It is well known that the real estate industry, just like the economy as a whole, goes through cycles. Hekman (1985) finds that, for fourteen metropolitan statistical areas (MSAs), the commercial real estate sector is highly cyclical, following the national economic cycle
We witnessed the housing boom period of 1998 through 2006, followed by the housing recession years of 2006 through 2011, which since has been replaced by the current up-market trend that continues to this day
We observe that the two economic recessions defined by the NBER during this period, the first short one from March 2001 to November 2001 and the second one from December 2007 to June 2009 were not in synchronization with the real estate market recessions
Summary
It is well known that the real estate industry, just like the economy as a whole, goes through cycles. Hekman (1985) finds that, for fourteen metropolitan statistical areas (MSAs), the commercial real estate sector is highly cyclical, following the national economic cycle. Hekman (1985) finds that, for fourteen metropolitan statistical areas (MSAs), the commercial real estate sector is highly cyclical, following the national economic cycle. He observes that local and regional economic conditions exert important forces on the MSA office market. These findings are reinforced by Dokko, Edelstein, Pomer and Urdang (1991), who demonstrate that local market conditions and macroeconomic conditions, especially inflationary expectations, operate in tandem to generate cyclical outcomes for local real estate markets. The last seventeen years is no exception The housing market has recovered much of the losses even though the economic recovery has yet to reach its full potential
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