Unemployment, Financial Frictions, and the Housing Market

We develop and calibrate a two-sector, search-matching model of the labor market augmented to incorporate a housing market and a frictional goods market. The labor market is divided into a con-struction sector and a non-housing sector, and there is perfect mobility of unemployed workers across sectors. In the frictional goods market households, who lack commitment, \u85 nance random consumption opportunities with home equity loans. The model can generate multiple steady-state equilibria across which housing prices are negatively correlated with unemployment. Relaxing lending standards typi-cally reduces unemployment, but it can have non-monotonic e¤ects on housing prices and supply. It also leads to a reallocation of workers across sectors, the direction of which depends on \u85rmsmarket power in the goods market. Quantitatively, we \u85nd that innovations that generate an increase in home equity-based borrowing of the same magnitude as the one observed during the 90s explain a reduction in the steady-state unemployment rate between 1/2 and 1 percentage point depending on the calibration strategy