Housing Decision with Divorce Risk

Fischer, Marcel and Khorunzhina, Natalia (2018): Housing Decision with Divorce Risk. Forthcoming in: International Economic Review

Abstract

We build a realistically calibrated life-cycle model of housing decisions under divorce risk. As observed in the data, our model predicts the recent increase in divorce rates leads to reduced homeownership rates. The event of a divorce negatively affects homeownership, and this effect is long-lasting. The risk of a divorce triggers a precautionary savings motive. However, this motive is weaker when individuals can invest in owner-occupied homes because homeowners’ higher savings partially substitute for precautionary savings. When young, the larger asset accumulation due to divorce-risk induced precautionary savings enables households to buy homes earlier, whereas the presence of transaction costs leads to reduced homeownership for middle-aged and older households when divorce risk goes up.

• Item Type: MPRA Paper
• Language: English
• Keywords: household finance, real estate, life cycle, divorce risk, family economics
• Subjects: D - Microeconomics > D9 - Intertemporal Choice > D91 - Intertemporal Household Choice ; Life Cycle Models and Saving; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E21 - Consumption ; Saving ; Wealth; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; J - Labor and Demographic Economics > J1 - Demographic Economics > J12 - Marriage ; Marital Dissolution ; Family Structure ; Domestic Abuse; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis > R21 - Housing Demand

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