How does a fall in house prices a¤ect real activity? This paper presents a business
cycle model in which a decline in house prices reduces geographical mobility, creating
distortions in the labor market. This happens because homeowners face declines in
their home equity levels, after which it becomes more di¢ cult to provide the down-
payment required for a new mortgage loan. Unemployed homeowners therefore turn
down job o¤ers that would require them to move. The model explains joint cyclical
patterns in housing and labor market aggregates, as well as the puzzling breakdown
of the U.S. Beveridge curve that occurred during 2009.
Key Words: Housing Markets, Labor Markets, Re…nancing Constraints
JEL Classification: E24, E44, R21