Staying together for the sake of the bills: Part 2, living with it

January 30, 2009 | Configuration, Families, Housing, Rental, Tenure, US News

[Continued from yesterday’s Part 1.]


As we saw yesterday, using some slice-of-life divorce drama from The New York Times, divorce not only ends a legal entity (the marital estate), it requires division of the assets into two independent clusters.



Each of us gets half of these assets


Dividing the marital union destroys economic value, both in transaction costs and in anti-economies of scale, leaving some couples unable to afford to break up:


For other couples it does not have to end.


Because housing demand is elastic, there’s a direct correlation between housing consumption and family size.  It works going upward (more bedrooms means more babies) and it works the other way.  Less money means less space means more people per household means fewer households.  There’s strong evidence that the high cost of housing in Europe has contributed to the low birth rate in countries like the UK and Italy. 

The same dynamic works unhappily in reverse – people who no longer wish to live together nevertheless cannot afford to live apart:


Lisa Decker, a certified divorce financial analyst in Atlanta, said she was seeing couples who were determined to stay together even after divorce because they could not sell their home, a phenomenon rarely seen before outside Manhattan.


Why has Manhattan such a prevalence of post-romantic couples?  Because of rent control!  Rent control chokes off new housing supply and keeps the island in a state of permanent housing shortage.


If you are what you live in, what you live in can become what you are.


“We’re finding the husband on one floor, the wife on the other,” Ms. Decker said. “Now one is coming home with a new boyfriend or girlfriend, and it’s creating a layer to relationships that we haven’t seen before. Unfortunately, we’re seeing ‘The War of the Roses’ for real, not just in a Hollywood movie.”



Awful movie, by the way


In California, James Hennenhoefer, a divorce lawyer, said couples were taking advantage of the housing crisis to save money by stopping their mortgage payments but continuing to live together for as long as they can.


Novel definition of ‘taking advantage of the housing crisis,’ since if there were ample capital, the couples would long since have divorced and moved into new accommodations.


“Most of the lenders around here are in complete disarray,” Mr. Hennenhoefer said. “They’re not as aggressive about evictions.”



Clients capitalizing on lender disarray?  Hennenhoefer.


Which in a way is ironic, since foreclosure normally cancels a lease. 


“Everyone’s hanging around in properties hoping the government will buy all that bad paper and then they’ll negotiate a new deal with the government.”


The next time you hear a sob story, remember this bit of moral hazard.  People can choose not to pay their mortgages, and can make their choice based on who they think their lender is.  All over the world, people think a government lender won’t enforce its own rules.



But scamming is such hard work


“They just live in different parts of the house and say, ‘We’ll stay here for as long as we can, and save our money, so we have the ability to move when and if the sheriff comes to toss us out.’ ”


Mr. Hennenhoefer said this tactic worked only with first mortgages; on second and third mortgages, the lenders pursue repayment even after the homeowners have lost the home.


Many loans, especially junior ones, are recourse, meaning the lender goes after the borrower’s personal collateral, not just the real estate.  Defaulting there isn’t so smart.


Dee Dee Tomasko, a nursing student and mother in suburban Cleveland, expected to leave her marriage with about $200,000 in starter money, primarily from the marital home, which was appraised at about $1 million in 2006.  By the time of her divorce last year, however, the house was appraised at $800,000; her share of the equity came to about $105,000.


In joint-property states, divorce assets are usually divided 50-50, as here.


Though she is relieved to be out of the marriage, if she had known how little money she would get “I might have stuck with it a little more; I don’t know,” Ms. Tomasko said, adding, “Maybe it would’ve made me think a little harder.”


Because there’s a term for people who exchange sex for money –



I’ll give you three guesses what it is, big boy


– we have to be very careful treading down the path of linking payment to continuation in a marriage. 



Think not evil thoughts on the eightfold path


I’m sure Ms. Tomasko would like to rephrase her answer.


For divorcing spouses with resources, though, there can be opportunities in the falling housing market.


Opportunity‘ is another euphemism:


Josh Kaufman and his wife bought a new 6,500-square-foot house outside Cleveland on five and a half acres, with four bedrooms and two three-car garages, that was worth $1.5 million at the height of the market.


By the way, note the extraordinary bargain that is American residential housing.  The house is huge, and the $240-per-square-foot price incredibly low.



What 6,500 square feet looks like from the street


When they divorced in June, Mr. Kaufman knew his wife could not afford to carry the home.


Divorce frequently raises a classic financial asymmetry; only one party can afford to own the large non-monetary asset. 


The longer the divorce process continued, the more the house depreciated; by the time he assumed the house, its appraised value was half what the couple had put into it; he did not pay her anything for her share.


The party with greater liquidity and carrying power can wait out, or starve out, his soon-to-be-ex-partner, a realekonomik tactic I find reprehensible precisely because it is so likely to be effective.


“From a negotiating standpoint we knew that she couldn’t afford to stay in it,” Mr. Kaufman said. “It appeared as an opportunity to turn the negative situation around. There was no emotion involved. It was a business decision on what made most financial sense. It wasn’t an attempt to take advantage of someone.”


No, no, certainly not.



I just try to give pleasure


Still, his lawyer, Andrew A. Zashin, said, “He bought this house at a bargain basement price.”



Zashin’s clients know a bargain when they live in one


To give Mr. Kaufman more credit than his attorney has, he’s taking on the risk that the home price will decline further.  His ex-wife has liquidity and mobility – something our next divorcee wishes she had:


For Nancy R., who spoke on condition of anonymity because her colleagues do not know her marital status, the impediments to divorce are visible every time she opens her door.



Nancy R, meet Franz K


“There’s three other houses for sale on our same road,” she said. “There’s no way our house would sell.”


For now the couple are separated, waiting for real estate prices to recover. But for Ms. R., that means remaining financially dependent on her husband. He moved out; she remains in the house.


While I can understand Ms. R’s desire to start completely afresh, for her to have a rent-free tenancy while her soon-to-be-ex-husband lives elsewhere seems quite civilized.


“I still feel kept in certain ways, and I don’t want to rock the boat,” she said.  “And it’s draining. So suddenly, when there’s an economic crunch, we’re paying for two places.”


I presume Ms. R means that both her husband’s apartment and the family home are being paid out of their joint checking account – or in any case, the costs will come out of the marital estate, so they’re being shared.


The same dynamics that marked their marriage now hang over their separation, she said: “He has the ultimate control.”



My financial team has ultimate control


One further presumes that Mr. R is the higher-earning spouse; if so, and presuming that this was their economic relationship when they married, Ms. R has had the good fortune to live in housing she could not afford on her own income.  Through marriage, she benefited from an expansion in living standards – two can live more cheaply together than alone – and now she must unwind that.


“We can’t sell the house,” she said, “and whatever settlement I get depends on a good relationship with him, based on his good will.”


I doubt Ms. R’s attorney would acquiesce in such a passive view; divorce is dominated by principles of judicial equity strongly protective of the non-earning spouse.


Still, human beings are involved, and life is not so cut and dried:


“The lines get blurry and confused quickly, which makes emotions fly easily” — especially if she were to start dating.


“Any icing on the cake is going to come from his good will,” she said, “and that means being the peacemaker. I’m the underdog in this situation. We’re basically forced to remain in a relationship after we’ve decided to end it.”


Welcome to the nineteenth century.



One of us has all the mobility