Interest-only mortgages and speculation in hot housing markets

Even as housing markets have temporarily shut down across the U.S. during the Covid-19 pandemic, housing remains a key sector that contributes disproportionately to fluctuations in overall economic activity and that will likely play an important role as the economy reopens. Interest in this market among research economists and policymakers intensified after the exceptional boom and bust in housing between 2003 and 2008. In this Chicago Fed Letter, we describe research in Barlevy and Fisher (2020)1 that examined patterns in the kinds of mortgages homebuyers took out in different cities during this episode. Recently, some have argued that the same kinds of mortgages that were used in the hottest real estate markets back then were beginning to reappear before the pandemic broke out, at least in some markets. These types of mortgages may also be more appealing in the near term for households who find themselves financially constrained in the wake of the pandemic.