This paper investigates the macroeconomic effects of search risk in the housing
market. To do so, I introduce a tractable directed search model of housing with mul-
tidimensional buyer and seller heterogeneity. I incorporate this framework in an in-
complete markets macroeconomic model with long-term mortgages and equilibrium
default. I show that search risk spills over into higher foreclosure risk by creating a
debt overhang problem. Heavily indebted sellers post high selling prices, take a long
Can inﬂating away nominal mortgage liabilities cure debt overhang and combat a severe housing bust? With a focus on the Great Recession, I address this question using a structural macroeconomic model of illiquid housing, endogenous credit supply, and equilibrium default. First, I show that the model successfully replicates and provides insight into the dynamics of the U.S. economy since 2006. Second, I show that temporarily raising the inﬂation target would have cut foreclosures by over 60% and led to a more robust recovery in real economic variables.