We were ................... decorating the living room, when our guests from Chicago arrived, a week early.

We were in the thick of decorating the living room when our guests from Chicago arrived, a week early. 

The phrase "in the thick of" means to be in the middle of an intense or busy activity, and is hence the correct choice. 

Why not others:

• "Piling it on thick" (or "laying it on thick") means exaggerating something, usually flattery, praise, or sympathy, to an excessive degree.
• "Fast and thick" (more commonly "thick and fast") describes things coming rapidly and in large quantities, all at once.
• "Thick on the ground" means something is very common or abundant, and is often used in the negative.