Housing Decision with Divorce Risk

International Economic Review, Vol. 60(3), 2019

47 Pages Posted: 19 Dec 2018 Last revised: 16 Jan 2019

See all articles by Marcel Fischer

Marcel Fischer

Copenhagen Business School

Natalia Khorunzhina

Copenhagen Business School - Faculty of Economics and Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: November 14, 2018

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.

Keywords: household finance, real estate, life cycle, divorce risk, family economics

JEL Classification: G11, D91, E21, J12, R21

Suggested Citation

Fischer, Marcel and Khorunzhina, Natalia, Housing Decision with Divorce Risk (November 14, 2018). International Economic Review, Vol. 60(3), 2019. Available at SSRN: https://ssrn.com/abstract=3284950

Marcel Fischer (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45-3815-3628 (Phone)

Natalia Khorunzhina

Copenhagen Business School - Faculty of Economics and Business Administration ( email )

Frederiksberg, DK - 2000
Denmark

HOME PAGE: http://sf.cbs.dk/nk

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