The present paper studies the impact of a housing bust on regional labor reallo-
cation and the labor market. I document a novel empirical fact, which suggests that,
by increasing the fraction of households with negative housing equity, a housing bust
hinders interregional mobility. I then study a multi-region economy with local labor
and housing markets and worker reallocation. The model can account for the positive
co-movement of relative house prices and unemployment with gross out-migration and
negative co-movement with in-migration observed in the cross section of states. A
housing bust creates debt overhang for some workers, which distorts their migration
decisions and increases aggregate unemployment in the economy. This adverse e ect
is ampli ed when regional slumps are particularly deep as in the recent U.S. recession.
In a calibrated version of the model, I nd that the regional reallocation e ect of
the housing bust can account for between 0.2 and 0.5 percentage points of aggregate
unemployment and 0.4 and 1.2 percentage points of unemployment in metropolitan
areas experiencing deep local recessions in 2010. Finally, I study the labor market
e ects of two policies proposed for addressing the U.S. mortgage crisis.