The Latte Effect or a Bread Shortage? The True Cause of Housing Unaffordability


June 12, 2023 2:25PM

If you were alive in the 2000s you at one point or another saw Suze Orman, the personal finance guru, yell at someone for spending $5 on a Starbucks latte every day and how they would never be able to retire. The idea, known as the “latte effect” was that small transactions that were trivial at the moment add up over time and prevent you from making larger purchases or saving enough. Now, I won’t dispute the importance of tracking all your expenses. Lord knows my wife dreads our weekly budget meeting, but what’s more likely to ruin your finances are large expenses, like a car you can’t afford, and even more often these days are housing prices.

The rule of thumb is that anyone who spends more than 30 percent of their income on rent or their mortgage is “housing burdened.” Here in Tennessee, more and more are hitting this number. In fact, a recent article from the Tennessean highlighted how the average Nashville-area renter spends 29 percent of their income on rent. Think you’d be better off to buy and ‘not throw away your money on rent?” Maybe, but not necessarily. The average homeowner in Middle Tennessee now spends a staggering 39 percent of their household income on a monthly mortgage. So what is the average Tennessean to do? For most, the answer is to move further and further out into the suburbs. In fact, a recent survey found that roughly half of all moves by renters were in order to find a more affordable location, not job changes, bigger spaces, etc.

Why is housing becoming so expensive in Tennessee? Consider the analogy from Lee Sands, a policy expert on housing and other issues with the Libertas Institute in Utah:

Imagine if you went to a grocery store where the price of the bread on the shelf was subject to a bidding war. There’s one loaf on the shelf, and there are ten other interested shoppers. It’s wheat bread with nuts sprinkled on top — not exactly everyone’s top choice — but the pantry is empty, and the kids are hungry.

“Four dollars!” a lady from the middle of the group shouts. “Five!” a young man counters. Bids of six, seven, and eight quickly follow. The bid hits ten dollars before things slow down. A man from California breaks the silence.

“Fifteen dollars for the bread,” he states. Obviously having won the bidding war, he pushes his cart to the shelf, places the loaf on top of his eggs, and wheels away.

The other shoppers are frustrated. A loaf of bread is not worth fifteen dollars, they insist. Searching for solutions, some of the shoppers propose, “Force the store to sell bread for two dollars,” “Close the doors to Californians,” and “Double everyone’s income so we can afford bread.”

None of these proposals would solve the underlying problem, which is that the grocery store has a bread shortage. In this example, the overpriced bread problem isn’t solved by declaring a bread crisis and debating about growth. The solution is obvious — the store should bake more bread. 

The problem is that government regulations prevent more houses (bread) from being constructed, especially ones that would be cheaper and more affordable, mainly through zoning laws. Zoning laws are land-use regulations that restrict the uses and density of development on people’s private property. By drawing arbitrary lines on a map, local governments restrict the types of housing that can be built, usually prohibiting smaller homes and apartments in favor of larger homes and lots. The restrictions effectively serve as arbitrary limits on how many loaves of bread can be on the shelf. To highlight this byzantine labyrinth of zoning laws, Beacon released our Zoning Atlas showing how local zoning requirements restrict certain types of housing on large portions of Middle Tennessee. Our hope is that this will highlight the need for reform and the elimination of arbitrary government regulations that restrict supply and inflate housing costs, the only true solution to relieving the financial pressure on Tennessee families. In essence, if you want to solve the bread shortage, you have to bake more bread.