Lose the Marriage, Keep the House

I feel badly for a couple I know who have recently divorced after several decades of marriage but are still bound together by the family home that they cannot sell. They are lucky in that they can afford to live apart. But only just barely, and the burden of carrying three homes (with one income earner) is just that, a burden, in an already stressful period of their lives.

We generally think that periods of financial stress break marriages down. If this is true then divorce rates should increase in a recession. A new economics paper, however, finds just the opposite – it finds that economic turmoil is keeping couples together and that low house prices are the reason. *

Imagine you are married and you would really rather you weren’t. If house prices have fallen since you purchased your family home, then despite the loss in equity in your current home, buying a new home (or two) is now more affordable, so falling house prices might increase your willingness to follow your heart and end the relationship. If house prices have increased though, buying a new home is less affordable for you and although you will be able to take more equity out of your existing home, the increase in house prices might decrease your willingness to end your marriage.

If this is the mechanism then when house prices fall, divorce rates should increase; and when house prices increase, divorce rates should fall.

In reality, it seems that couples prefer to stay in their less than satisfying marriages than to sell their family homes at a loss. For many whose home values have fallen below the value of their mortgage selling might not be a choice, especially if their bank will not permit the sale at a loss. Even if that is not the case, there is an emotional barrier to selling a home at a loss that economists call “loss aversion”. This barrier causes people to hang onto their homes, and stay in their marriages, in the hope of reducing that loss in the future.

House prices fell almost 30% between April 2006 and August 2010. Can we tell how this dramatic market adjustment affected the divorce rate?

According to this research, just a 10% decrease in house prices decreased the divorce rate of college educated households (those that are more likely to own their homes rather than renting) by from 11.6% to 8.22% — an incredible 29% decrease. 

How about this though, a decrease in house prices has the opposite effect on the divorce rate of people with less than a high school education; a 10% decrease in house prices increased the divorce rate of these people from 14.6% to 17.6% — a 20% increase. This outcome is probably capturing the destructive effect on marriages caused by the economic turmoil independent of the house prices since these couples are less likely to be losing home equity in a divorce.

I know firsthand how soul destroying it is to stay in a relationship after the love is gone. Maybe some of these couples who stay together because of low house prices will find that the additional years together forced by the fall in house prices will help them reconcile their differences. Many others will not though and will divorce as soon as they can realise a gain on their property. By the time that happens they will have lost more than just the opportunity to buy when the market is low; they will have lost years of their lives to an unhappy marriage.

* Farnham, Martin; Lucie Schmidt and Purvi Sevak (2011) “House Prices and Marital Stability.” American Economic Review Vol. 101(3).