Using a quantitative heterogeneous agents macro-housing model and detailed micro data, this paper studies the drivers of the 2006-2011 housing bust, its spillovers to consumption and the credit market, and the ability of mortgage rate interventions to accelerate the recovery. The model features tenure choice between owning and renting, rich portfolio choice, long-term defaultable mortgages, and endogenously illiquid housing from search frictions. The equilibrium analysis and empirical evidence suggest that the deterioration in house prices and liquidity transmitted to consumption via balance sheets that vary in composition and depth is central to explaining the observed aggregate and cross-sectional patterns.
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