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Behind the Great Recession: Job Search and Housing Decisions

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  • Rendon, Silvio

    ()
    (Stony Brook University)

  • Quella, Núria

    ()
    (Stony Brook University)

Abstract

In this paper we analyze a mechanism that is particularly relevant to the workings of the Great Recession: we explain how easier home financing and higher homeownership rates increase unemployment rates. To this purpose we build a model of job search with liquid wealth accumulation and consumption of housing that can be rented, bought on credit, or sold. In our model, more relaxed house credit conditions increase workers' reservation wages, making them more selective in their job search. More selective job searches deteriorate employment transitions: job finding and job-to-job transitions rates decline while job loss rates increase, causing the overall unemployment rate to rise. We estimate this model structurally using NLSY data from 1978 until 2005. We find that more relaxed housing lending conditions, particularly lower downpayment requirements, increase unemployment rates by 6 percent points. We also find that declining labor demand decreases homeownership rates by 14 percent points.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 7773.

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Length: 41 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:iza:izadps:dp7773

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Keywords: job search; housing; savings; structural estimation;

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  1. Marcus Hagedorn & Fatih Karahan & Iourii Manovskii & Kurt Mitman, 2013. "Unemployment benefits and unemployment in the Great Recession: the role of macro effects," Staff Reports 646, Federal Reserve Bank of New York.
  2. Matteo Iacoviello & Marina Pavan, 2011. "Housing and debt over the life cycle and over the business cycle," International Finance Discussion Papers 1032, Board of Governors of the Federal Reserve System (U.S.).
  3. Silvio Rendón, 2002. "Job Search And Asset Accumulation Under Borrowing Constraints," Economics Working Papers we025219, Universidad Carlos III, Departamento de Economía.
  4. Jeremy Lise, 2013. "On-the-Job Search and Precautionary Savings," Review of Economic Studies, Oxford University Press, vol. 80(3), pages 1086-1113.
  5. Matthew Chambers & Carlos Garriga, 2005. "Accounting for Changes in the Homeownership Rate," Computing in Economics and Finance 2005 304, Society for Computational Economics.
  6. Jonas D. M. Fisher & Martin Gervais, 2009. "Why has home ownership fallen among the young?," IFS Working Papers W09/08, Institute for Fiscal Studies.
  7. Martin Gervais, 1998. "Housing Taxation and Capital Accumulation," UWO Department of Economics Working Papers 9807, University of Western Ontario, Department of Economics.
  8. Jesse Rothstein, 2011. "Unemployment Insurance and Job Search in the Great Recession," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(2 (Fall)), pages 143-213.
  9. James Costain, 1997. "Unemployment insurance with endogenous search intensity and precautionary saving," Economics Working Papers 243, Department of Economics and Business, Universitat Pompeu Fabra.
  10. Atif Mian & Amir Sufi, 2011. "House Prices, Home Equity-Based Borrowing, and the US Household Leverage Crisis," American Economic Review, American Economic Association, vol. 101(5), pages 2132-56, August.
  11. Paul Flatau & Matt Forbes & Patric H. Hendershott, 2003. "Homeownership and Unemployment: The Roles of Leverage and Public Housing," NBER Working Papers 10021, National Bureau of Economic Research, Inc.
  12. Fang Yang, 2009. "Consumption over the Life Cycle: How Different is Housing?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 423-443, July.
  13. Sommer, Kamila & Sullivan, Paul & Verbrugge, Randal, 2013. "The equilibrium effect of fundamentals on house prices and rents," Journal of Monetary Economics, Elsevier, vol. 60(7), pages 854-870.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Did home ownership made things worse in the Great Recession?
    by Economic Logician in Economic Logic on 2014-01-14 16:38:00

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