House Price Shocks and Individual Divorce Risk in the United States

Abstract

Households in the United States hold a significant portion of their total wealth in owner-occupied housing. Thus, changes in housing prices may have an important impact on the marital surplus the household enjoys. What happens to marriages of homeowners when there is a shock to housing prices? This question was addressed using household data from the panel study of income dynamics (PSID) and a quarterly MSA level house price index from the Federal Housing Finance Agency, controlling for local labor market conditions. House price shocks were calculated as the cumulative sum of residuals of a second order autoregressive model from the previous four years. Results showed that positive house price shocks stabilized marriage for all couples. A one standard deviation increase in the house price shock decreased the risk of divorce in the following year by about 13–18%. The results were driven by the younger cohort of households in the PSID, those with lower educational attainment, and those with relatively low family income. The findings are discussed in the context of theories on changes in marital surplus, and changes in the transaction costs surrounding divorce.