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

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Homes are great when we’re sessile, but when we’re mobile, the equity is a millstone – too valuable to abandon without a fight, yet incredibly difficult to liquefy, as illustrated in this revealing slice-of-life divorce drama from The New York Times:

When Marci Needle and her husband began to contemplate divorce in June, they thought they had enough money to go their separate ways.  

Legally, you see, divorce is ‘financial death’ – the death of a legal entity known as the marriage.  Although (thankfully!) never divorced myself, I’ve done some divorce-related expert-witness and valuation work and have always been struck by its phraseology.  In divorce, the couple’s aggregate property is called the ‘marital estate.’   The marriage, which is a legal entity (one reason why supporters of gay marriage want it), is legally dead, and its corpus is being divided. 

Dividing property is sometimes hard to do

Unlike a testamentary estate, where the benefactor is dead and hence bequests are governed by a written instrument (the will or a trust), a marital estate’s benefactors and beneficiaries are the same, and both very much alive and contributing to the economic aggregate.  Because they don’t like each other, the divorcing parties are bound and determined to assure that they get their ‘fair share,’ and with the moral parallax that always accompanies such dissolutions, tussles arise.

They owned a million-dollar home near Atlanta and another in Jacksonville, Fla., as well as investment properties.

[For the rest of this post, I'm going to set aside questions of fairness, the impoverishing consequences of shuttling children between two separated parents, and principles of equity surrounding 'who contributed what' to the marriage.  All of that is the stuff of many a divorce battle, but it's all relevant to the housing finance elements, so we will thankfully pretend that both parties are acting as purely rational dividers of the marital cake. – Ed.]

I want the bigger half!

Setting aside questions of fairness, the marital division is easy when every asset has a liquid value, and when every asset has equity above debt. 

In a typical divorce, the starting point for legal posturing usually revolves around two basic questions:

1. What is the aggregate estate value (E)?

2. What share should each spouse receive?

Add up the numbers, maximize E (after-tax, of course), and then multiply by H% and W% for Husband and Wife, and you’re done. 

Or are you?

In the real world, asset values are arguable, and asset equity is often unrealizable:

Now the market for both houses has crashed, and the couple are left arguing about whether the homes are worth what they owe on them, and whether there are any assets left to divide, Ms. Needle said.

“We’re really trying very hard to be amicable, but it puts a strain on us,” said Ms. Needle, the friction audible in her voice.

From the NYT: Ms. Needle trying hard to be amicable.

“I want him to buy me out. It’s in everybody’s interest to settle quickly. That would be my only income. It’s been incredibly stressful.”

Ms. Needle’s choice of phrases tips us off to further hidden complexity in a marital dissolution – not all assets are equally useful to each spouse, so they are not freely tradable between the divorcing parties. 

Each asset can be considered as having these additional dimensions:

It’s all a matter of raising your perspective

1.  Liquidity.  Can the asset be sold easily, with difficulty or not at all?  Some assets, like the earning spouse’s partnership share in a law or accounting firm, or restricted stock in a pre-IPO company, may not be sold at all.  But they obviously have value.

2.  Penalties of liquidation.  It’s easy to sell a stock – but when you do, you pay a capital gains tax (or take a capital loss).  It’s hard to sell a house – and even when it goes smoothly, you have brokerage commissions, closing costs, and dozens of other fees.  All this financial entropy drains money out of the marital estate. 

(We’ll pass lightly over the legal bills incurred by each side in fighting out personal and equitable-settlement issues; they’re a consequence of divorce, not of dissolution.)

You’re not leaving until you pay your legal bills

3.  Benefit mix.  Some assets – stocks and bonds – have a market value based mainly on their potential to generate future cash flows to investors and holders.  Other assets – like the family home – have a high market value but represent ongoing cash obligations – negative cash flow.  If one spouse has a lot of earning power and the other doesn’t, who receives which asset mix depends in part on who needs cash flow after the divorce.

Indeed, it gets even tougher when you own an asset you can’t use and can’t sell:

With nearly one in six homes worth less than the mortgage owed on it, according to Moody’s Economy.com, divorce lawyers and financial advisers around the country say the logistics of divorce have been turned around. “We used to fight about who gets to keep the house,” said Gary Nickelson, president of the American Academy of Matrimonial Lawyers. “Now we fight about who gets stuck with the dead cow.”

I don’t want it, you take it

Long ago – 1994, to be precise – I published an enormous article in the AAML Journal with the mouth-watering title, Valuation of Real Estate Interests in Non-Transactional Situations – ‘non-transactional’ meaning that the property itself wasn’t being sold or refinanced, rather it was just sitting there.

Wrote an enormous article about partnership interests for the AAML.

As a result, divorce has become more complicated and often more expensive, with lower prospects for money on the other side. Some divorce lawyers say that business has slowed or that clients are deciding to stay together because there are no assets left to help them start over.

“There’s an old joke,” said Randall M. Kessler, Ms. Needle’s lawyer. “Why is a divorce so expensive? Because it’s worth it. Now it better really be worth it.”

I’m worth it

Two do live more cheaply as a team.  Divorce increases their aggregate ecosystemic expenses, plus it costs money to accomplish.  It’s no surprise that divorce correlates with poverty; destroying the family unit increases everyone’s costs, and the parties pay a surcharge to do it.

For couples already under stress, the family home has become a toxic asset.

I’ve previously posted that you are what you live in.  Because more bedrooms means more babies, most people buy a house when they are starting a family (our euphemism devaluing marriages without children), so that first home purchase becomes fused in their minds with the family and the children.  If the spouse who helped you make the babies has become hateful to you, so does the house in which the babies have been growing into children.  You want to get away from it as fast as you can.

“It’s much harder to move on with their lives,” said Alton L. Abramowitz, a partner in the New York firm Mayerson Stutman Abramowitz Royer.

Mr. Abramowitz said he was in the middle of several cases where the value of the real estate could not be determined.

Riddle me this: what’s your real estate worth?

Entirely unsurprising, and made more difficult because the divorcing spouses can’t decide whether they want the price to be high (if they’re planning on having the house sold) or low (if they’re hoping to live there after the divorce and moveout).

“All of a sudden,” he said, “prices are all over the place, people aren’t closing, and it becomes virtually impossible to judge how far the market has fallen, because nothing is selling.”

For John and Laurel Goerke, in Santa Barbara, Calif., the housing market crashed in the middle of what Mr. Goerke said had been an orderly legal proceeding. At the height of the market, Mr. Goerke said, they had their house appraised at $2.3 million, which would have given them about $1 million to divide after paying off the mortgage.  But by the time they sold last year, the value had fallen by $600,000, cutting their equity by more than half.

From the NYT: John says it was so much more orderly when we had enough money to split

The irrationality of divorcing parties is so well known as to be virtually a cliche.  Trust has broken down, so the teamwork that makes a good marriage successful is turned against itself.  The result is duplicative expenditure of money, time, and emotional investment:

“That changed everything,” said Mr. Goerke, who is now nearly two years into the divorce process, with legal and other fees of several hundred thousand dollars. “The prospect of us both being able to buy modest homes was eliminated. The money’s not there.”

Maybe it would have been there had the parties settled sooner, or devised an equity-sharing arrangement to cope with the vast uncertainty.

Now, with both spouses living in rental properties –

Echoes of Jarndyce v. Jarndyce, the infinite chancery case:

Jarndyce and Jarndyce drones on. This scarecrow of a suit has, in course of time, become so complicated that no man alive knows what it means. The parties to it understand it least, but it has been observed that no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause; innumerable old people have died out of it.  

Free advice to anyone embroiled in a divorce: never let the lawyers run the case. 

– their lawyers still cannot agree on what their remaining assets are worth.

That’s your job as litigants, not the lawyers’ job.  But then, divorce can be irrational:

Their wealth is ticking away at $350 an hour, times two.

“It’s got to end,” Mr. Goerke said, “because at some point there’s nothing left to argue about.”

Except ‘divorce granted’

So wrote Dickens:

Scores of persons have deliriously found themselves made parties in Jarndyce and Jarndyce without knowing how or why; whole families have inherited legendary hatreds with the suit. The little plaintiff or defendant who was promised a new rocking-horse when Jarndyce and Jarndyce should be settled has grown up, possessed himself of a real horse, and trotted away into the other world. Fair wards of court have faded into mothers and grandmothers; a long procession of Chancellors has come in and gone out; the legion of bills in the suit have been transformed into mere bills of mortality; there are not three Jarndyces left upon the earth perhaps since old Tom Jarndyce in despair blew his brains out at a coffee-house in Chancery Lane; but Jarndyce and Jarndyce still drags its dreary length before the court, perennially hopeless.

As long as there are lawyers, there will be writs

Is there no alternative to a debilitating and impoverishing divorce?

[Continued tomorrow in Part 2.]

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I’m not enjoying your taste in music

Noise travels, and it cannot be shut out (nor can odor), so when your neighbors are noisy, it certainly disrupts your enjoyment, but what are you to do about it, particularly when the noisemakers are … children? 

How we grew America: immigrant children at Ellis Island

That’s dicey, as reported in The New York Times:

APARTMENT dwellers in New York City have long endured the trauma of jackhammers, Manolo Blahniks, recycling trucks, sirens, canines and air-conditioning systems.

Only the colors are loud, daring

But, perhaps because the population of children in the city is increasing, the sound of little feet is a complaint being voiced with increasing frequency.  And, for reasons ranging from a sense of entitlement to the impossibility of teaching a 3-year-old to glide to the potty like a supermodel, the parents of those little feet are not happy to hear that their children are driving you crazy.

Many, in fact, have heard just about enough of it. They complain that they are being forced to choose between being good neighbors and good parents.

As I’ve posted many times, New York is unique in American cities, not least because it always has a shortage of rental and affordable housing.  With increasing density comes verticality, and with verticality comes multiple dimensions of contact surface, multiple ways our neighbors can intrude upon us, and we on them.

“It’s nerve-racking to be constantly shushing my kids and not letting them be normal kids in the morning,” said Janeen Thompson, who lives in a postwar rental building in Park Slope, Brooklyn. Her two young sons — ages 5 and 2½ — have elicited multiple noise complaints from their downstairs neighbor, a 25-year-old woman with no children.

From the New York Times: SLEEP SCHEDULES Greg and Janeen Thompson, with their two sons, got complaints from their downstairs neighbor, who doesn’t have children. Both sides say they have tried to be sympathetic to the other’s plight.

We all know that having children is a life-changing and irreversible step that often triggers a move to the suburbs, and that children are a mind-altering drug, because with sleep deprivation comes an unconditional love so powerful it transcends all others.  Yet the parents try to accommodate the neighbors whom they used to resemble:

In the morning when the boys are getting ready for the day, Ms. Thompson said, she insists they not roll their little cars down the hallway, or run before 8 a.m. “I tell them the neighbor is still sleeping, and they just look at me — ‘Why is she sleeping?’ ”

I’m not!

Ms. Thompson said she can’t even let her children cry when they need to. “For six months straight, my younger son woke up at 2 a.m. — we kept him quiet for two hours every night so the neighbor wouldn’t hear him,” she said. “Finally, we had to post signs in the building saying we were going to let him cry it out for a weekend, so our neighbor wouldn’t get mad at us.”

Children shouldn’t live in high-rises.  They need lots of space to run around, get dirty, and be loud. 

Boys in Mumbai: even if you live in a high-rise and the wicket is cement, you need to play cricket!

The downstairs neighbor, who agreed to give her first name, Jennifer, but not her last, out of fear of being branded anti-child –

Nancy and I chose not to have kids.  We got our fair share of looks.

– said the children were waking up every single night in the middle of the week, which prompted her to pound on the ceiling after midnight, triggering an even noisier altercation with the children’s father.  

Pounding the ceiling is seldom the right strategy.  If you haven’t got their phone number, you drag on the bathrobe and sleepily take the elevator up a floor, to ring the doorbell.

And be polite

“The bedrooms of the parents and children are really far apart, so I don’t know if they can hear the children,” she said.

With urbanization, sound intrusion becomes more common. 

According to the professionals drawn into disputes about child noise — managing agents, lawyers, mediators and acoustical engineers — square-offs like these are increasingly common.

From the New York Times: Alan Fierstein, a Manhattan acoustic consultant, says his business is booming

What are the solutions?

1.  Learn to live with it.  Some people just suck it up and gradually inure themselves to the children’s presence.  Unfortunately for them, children have ear-piercing screams and cries – evolution’s way of making sure their parents can find them – and they’re not shy about deploying those little screechy lungs. 

I can’t do much but boy can I make noise!

2.  Behavior modification.  I admire the parents who try to teach their kids to behave like adults.  As a former child myself, I think they’re doomed to failure.  Children have to be kids, and they have to be hyperactive.

Even in a monsoon, we have fun!

3.  Soundproofing.  What technology taketh away – space – technology can giveth back – sound dampening.

“Fifteen years ago or so, it used to be that the noise complaints were all about loud stereo and TV equipment,” said Stuart M. Saft, a real estate lawyer at Dewey & LeBoeuf in Manhattan, which represents about 100 full-service co-op and condominium buildings in Manhattan. “Now it’s kid noise more than anything else, and I think it demonstrates the changing demographic of the city. You have more kids living in the apartment buildings, and parents who feel their children have the right to be children.”

‘Rights’ are tricky things; As Justice Oliver Wendell Holmes memorably put it, your right to swing your fist ends at my nose, and your children’s right to be loud may end at my eardrums – or, even better, at the walls of your apartment.

I have a right to be heard!

At the same time, even as New York City has become a magnet for young families, the escalating price of real estate has contributed to the feeling that people ought to get what they want and expect for their money.

“People’s expectations of quiet for their very expensive apartments have risen, so something that might not have bothered somebody 20 years ago because real estate was so inexpensive then does become an issue now,” said John Hauenstein, the president of JRH Acoustical Consulting Inc., which assesses and mitigates child noise issues.

I find it so cute that Mr. Hauenstein thinks New York apartments were cheap twenty years ago.

4.  The simplest solution.  What about the simplest solution? 

That’s a bit much

No children allowed?

Gee, Saturn, that’s illegal too

Sorry, it’s illegal to exclude children.  As a good Fair Housing site puts it:

Under fair housing laws, rentals must generally be available for rental to families with children and pregnant women. Families with children must be treated the same in advertising, during the application and selection process, and during their tenancy.

“Adults only” communities are generally not allowed, except in housing which qualifies as Housing for Older Persons.  

The law in its majesty makes it illegal not only to exclude children explicitly, but also implicitly:

How dare you try to discriminate against me!!!

Housing providers cannot establish strict occupancy limits that have the effect of discriminating against families with children.

And indirectly:

Housing providers may not restrict families to certain buildings or to first floor units.

We are thus forced to live together.  This is stressful:

Parents, meanwhile, feel persecuted.

From the New York Times: ON EGGSHELLS Margaret Hundley Parker and her husband don’t let their daughter play with loud toys in their bedroom, because it is right above their neighbor’s bedroom.

The problems of an Upper West Side mother who did not want her name used, out of fear of reigniting old tensions, began four years ago. Two days after she and her family moved into their $1.8 million prewar unit, they received a hostile missive from the 30-something married couple living below.

“It was a typewritten note in a typewritten envelope with a formal return address. It said something like, ‘We never heard a sound from the older couple who lived in your apartment, and now that you moved in, our peace is being disrupted and we don’t appreciate it.’ It set such the wrong tone, almost like a lawyer had sent it, and we had been in the building less than a week.

Probably a lawyer-husband-tenant did send it.  Not neighborly though.

No lawyers here

It would have been better even if it had just been handwritten instead of typed. It was like the punishment didn’t fit the crime.”

Had I been advising the downstairs apartment, I would have counseled them, Just because you are infuriated does not mean I intended to infuriate you.  A gentler tone is always wiser.

Still, she said: “I wanted to take the high road. They left their phone number so I called and introduced myself and left ours.” It was a decision she quickly came to regret.

Despite the wall-to-wall carpeting in her children’s bedrooms and a firm policy against bouncing balls indoors and leaping off beds, she fielded a series of “incredibly nasty” telephone calls that “were confrontational, upset and accusatory, not like, ‘Hey, do you mind — it’s getting a little noisy.’ ”

“Over the course of the next year, we felt we were living on eggshells,” she said. “It became almost a mantra, saying to the kids, ‘The neighbors, the neighbors.’ ”

A frosty detente set in when the couple downstairs had their first child two years ago.

That’ll do it!

“By now, I kind of know that our bedroom is over their bedroom and if we drop stuff on the floor it’s really loud for them, so if the baby has a loud toy I just shut the door so she doesn’t come in,” said Margaret Hundley Parker, a 39-year-old freelance writer who rents a postwar apartment on Prospect Avenue in Brooklyn.

“We do indeed walk on eggshells, and I find myself on tiptoes if I have high heels on, even when I’m not home,” wrote Ms. Parker in an earlier e-mail message. “I’m a trained monkey. But my 19-month-old is not.”

“We’d love to move,” she continued, “but did I mention the rent-stabilized apartment?”

You didn’t have to.

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