I empirically show that different types of houses experience substantially different rates of return over nation-wide housing cycles, even within narrow geographical areas. In order to understand the implications of this rate of return heterogeneity for the propagation of macroeconomic shocks, I present a dynamic assignment model in which housing is segmented by various quality tiers. I show that the model’s unique equilibrium features unidirectional propagation of shocks within the housing market — changes in households’ valuation of low-end homes have spill-over effects to house prices across the entire quality spectrum. I characterize the strength of these spill-over effects analytically, examine how they shape the cross-sectional response of house prices to changes in the economic environment, and show that they can lead to an amplification channel for the response of aggregate consumption expenditures to changes in house prices. In the data, consistent with the theory, shocks that affect high-income households only induce changes in the prices of high-end homes, whereas shocks that affect low-income households affect house prices in the entire market.