Mortgage Rates vs. the Corporate Bond Yield Index: Their Impact on the Housing Market in California during the Time of Qes

Mortgage interest rates in general move in tandem with Treasury bond yields. The corporate bond index is known to have a strong correlation with treasury yields, especially with those of five-year treasuries (see WSJ market data center, for example). It is not hard to infer then that there exists a close correlation between mortgage rates and the bond yield index, which suggests that one could use the corporate bond index (CBI) as a barometer of mortgage rates, as corporate rates are more easily available than mortgage rates, which are more localized. During the last decade-long Great Recession, however, the usually close relationship between bond yields and mortgage rates broke down at the various stages of the many Quantitative Easing (QE) programs. The degree of the divergence between these two rates during this period has been established in recent research. In this paper, we investigate how this divergence between the two rates affected housing prices differently during 2007-2014. To that end, we compare the impact on housing prices of mortgage rates on one hand and of the impact of CBI on the other, in California’s largest cities during this period. Our research shows that, once the close relationship between the two rates broke down as the result of QEs, significant divergence develops in their respective correlation coefficients on housing prices. We show the degree to which using the bond yield index as a barometer of mortgages rates can distort housing price estimates during the period of divergence between these two rates.The results show that, while both mortgage rates and the corporate bond yield index both have a strong explanatory power on housing values as can be expected, the regression coefficients become consistently weaker as the regression coverage period approaches the start of the QE (Table 1 & 2). We note however, as the sample period nears the housing collapse of the 2000s, the corporate bond yield index coefficients decrease more precipitously than the mortgage rate coefficients i.e. the effect of the corporate bond yield index on housing prices becomes noticeably and consistently weaker over time, more so than the mortgage rate coefficients do (see Table 1).One could explain this as the natural byproduct of the Treasury buy-back QE policies which suppressed the bond rates more than they affected mortgage rates, hence the divergence in values of these two variables as noted in Kim, Lee and Tran (2015).