Unemployment, Financial Frictions, and the Housing Market

Nicolas Petrosky-Nadeau and Guillaume Rocheteau

No 2013-E4, GSIA Working Papers from Carnegie Mellon University, Tepper School of Business

Abstract: 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 construction 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, finance 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 typically reduces unemployment, but it can have non-monotonic effects on housing prices and supply. It also leads to a reallocation of workers across sectors, the direction of which depends on firms' market power in the goods market. Quantitatively, we find that innovations or regulations that affect household finance can have a sizeable effect on steady-state unemployment but only a modest effect on housing prices.

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