Did the Housing Boom Affect Mortgage Choices

Rapid house price appreciation during the housing boom significantly influenced homebuyer selection of adjustable-rate mortgages over fixed-rate mortgages. In markets with high house price appreciation, house price gains directly influenced mortgage choice. But in markets with less appreciation, price gains did not influence borrower choices between adjustable or fixedrate mortgages. In addition, the influence of fundamental drivers of mortgage choice, such as mortgage interest rate margins, tended to be muted in markets with high price appreciation. The collapse of the housing market and the high default rates on residential mortgages in recent years suggest that bubble conditions distorted borrower decisions about mortgage financing. This Economic Letter examines the relationship of housing market conditions during the boom to buyer choices between fixed-rate and adjustable-rate mortgages. Our analysis indicates that the pace of house price appreciation had a significant impact on mortgage choice in high-appreciation markets compared with other markets. In high-appreciation markets, the pace of house price gains was strongly linked to the popularity of adjustable-rate mortgages. But, in other markets, changes in house prices had no effect on mortgage choice. These results are consistent with research showing that higher house price appreciation leads to terms on adjustable-rate mortgages