The Interaction between Job Search and Housing Decisions

In this paper we explain how easier home …nancing and higher homeownership rates increase unemployment rates. To this purpose we build a model of job search with liquid wealth accumulation and consumption of hous- ing, that can be rented, bought on credit, or sold. In our model, more relaxed house credit conditions increase workers'reservation wages, making them more selective in their job search. More selective job searches deteriorate employ- ment transitions: job …nding and job-to-job transitions rates decline while job loss rates increase, causing the overall unemployment rate to rise. We estimate this model structurally using NLSY data from 1978 until 2005. We …nd that more relaxed housing lending conditions, particularly lower downpayment re- quirements, increase unemployment rates by 6 percent points. We also …nd that declining labor demand decreases homeownership rates by 14 percent points.