This chapter contains more of the protagonist's musings on the Alder tree, the paradox of beauty and ugliness dwelling in the same being.
I have thought about this as well, and in brief I have come to the following conclusion: physical beauty is a physical manifestation of the grace of God. I believe that every person who lives is endowed with physical beauty by nature and by grace, and that it's only through an active (though not necessarily intentional) destruction of that beauty that someone can approach what I would call physical ugliness. Without going into detail (I am being brief), an example of this sort of thing is eating disorders. What makes this topic difficult for many people to grasp is that "beauty is in the eye of the beholder" has some truth to it, in the following sense: just because I do not find someone physically attractive does not mean that person is ugly (more properly, non-beautiful). So there has to be some concept of external or objective beauty in order for anyone to truly be beautiful, and I believe that everyone at birth is endowed with objective beauty by the grace of God.
To bring this back to the book, that includes people who do not love God and who walk contrary to his ways. It is this deliberately living contrary to God that fosters inner ugliness (and emptiness, much like the hollowed out sepulchral woman) even though one may still have the external beauty as from birth. But just like the Alder woman, over time the inner emptiness will slowly devour her life until even the external beauty is marred and destroyed.
The next encounter in the story clearly seems to be an intentional allegory, with the husband playing the role of an unbeliever (perhaps an atheist, kind but ignorant), and similarly with the son, though the son is described as being somewhat less benevolent and more scornful or disdainful, while the wife and daughter play the role of believers, those who believe they are in Fairy Land.
I hesitate to draw the allegory too strongly, because there is not a whole lot of details expressed here, but this allegory suggested itself to me immediately when I first read the passage. It reminds me of Pilgrim's Progress more than anything else: even though the family is left unnamed, the similarity in how the protagonist reacts to different characters in different ways is strongly reminiscent of Pilgrim's Progress. Upon further consideration, there are many sections of the book where there are similarities to PP, but never so strongly that I felt like Phantastes was being unoriginal.