housing; liquidity; search theory; credit constraints; household debt

The Cyclical Dynamics of Illiquid Housing, Debt, and Foreclosures

This paper quantitatively accounts for the cyclical dynamics of key macroeconomic housing and mortgage market variables using a tractable, search-theoretic model of housing with equilibrium mortgage default. To explain these dynamics, the model highlights the importance of liquidity spirals which arise from the interaction of search frictions and en- dogenous credit constraints. During housing busts, longer selling times spill over into higher foreclosure risk, thereby magnifying the response of credit constraints to the depressed housing market.

Subscribe to housing; liquidity; search theory; credit constraints; household debt