Before I dive in, let me quickly thank Megan for inviting me and the rest of the Modeled Behavior team to guest blog. I can't predict what any one of us will be blogging about, but it will tend to be related to economics. Fortunately, economics is the imperialist of the social sciences, and so we've the pseudo-authority to write about anything, so long as we stick "the economics of..." in front of it. Now, on to the economics of divorce.
The massive decline in house prices over the past few years has put a lot of strain on communities, families, and individuals. While one needn't look far to find someone whose life has been turned upside down by plummeting house prices, it's not well understood how changes in house prices affect families and individuals. One important outcome I'd like to delve into a little bit is divorce.
The way falling house prices can lead to more divorce is pretty straight forward. Wealth tied up in house evaporates, putting financial stress on a couple. They fight over the decision to buy the house in the first place, and what to do next. The house becomes an albatross. However, one can just as easily imagine how falling house prices decrease the probability of divorce. Loudon Wainright captures the dynamic well in the song House, from his recent album 10 Songs for the New Depression:
Forgive me dear for saying so, please don't think I'm a louse
But maybe it's a good thing, we can't sell our house.
Suppose we got a buyer, we could go our separate ways ,
And consider all our time together just a passing phase.
But we would lose each other dear, and I'm afraid we'd find
It was the best part of ourselves that we had left behind
Locked into a home, a couple that might otherwise divorce is stuck in place, and stuck together, as it were. This may be because selling the house at a loss would mean they don't have the money for two down-payments for them to own homes separately. Or they may have loss aversion, meaning they are irrationally unwilling to take a loss on their housing investment even though it is in their best financial interest to do so. Finally, they may not have negative equity or a loss on the house at all, but are simply holding out for a better market.
Renters are likely to be impacted not by falling house prices per se, but through through falling rent prices, which of course tend to be correlated. Lower market rents make it cheaper to go from one household to two, which could increase the probability of divorce. However, lower housing costs also represent an increase in wealth, which could reduce financial stress and thus make divorce less likely.
The above reasoning suggests that the effect of house prices can differ between renters and homeowners, mainly because falling prices make homeowners less flexible, and renters more flexible. Given the theoretical ambiguity, it would seem necessary to look at empirical evidence to solve this one.
Fortunately, a recent paper by Farnham, Schmidt, and Sevak sheds some
light on this issue. They found that the impact of falling house prices varied by education
The authors interpret the differential impact by education level as representing a proxy for homeownership. People with less education are more likely to be renters, and so the increased flexibility afforded to renters by lower house prices makes it easier for them to afford two rents instead of one. In contrast, those with more education are likely to be homeowners, and so falling house prices lock them in, as in the Loudon Wainright song.
Unlike the narrator in Mr. Wainright's song, I won't draw any conclusions about which group is worse off: the renters with the newfound economic freedom to get divorced, or the homeowners who turn to their spouses and realize "you can't up and walk out on me, and I can't run away".