Understanding Housing and Population Trends in Baton Rouge, LA

"2023 defied almost everyone's expectations: recessions that never came, rate cuts that didn't materialize, bond markets that didn't bounce, except in short-lived, vicious spurts, and rising equities that pained most investors who remained cautiously underweight."

- Candace Browning, Head of Bank of America Global Research

Hi Nuvo Community,

_{In exploring the Baton Rouge real estate market, we focused on two key metrics: the cost of housing and population growth from 2009 to 2021. Pulling data from the Federal Reserve of St Louis, we sought to extract housing affordability by examining the Regional Price Parity Index (RPP) of Housing. RPPs are regional price levels expressed as a percentage of the overall national price level for a given year. The price levels are determined by the average prices paid by consumers for the mix of goods and services consumed in each region. Taking the ratio of RPPs shows the difference in price levels across regions. Think of this as the general affordability of housing in one market compared to the national average. We compared this to population growth in the same area. The chart below shows the percentage change in these two data points over time. We don’t see too strong of an initial relationship looking at this data.}

_{Year-over-Year Change: A Stronger Analysis}

_{Now let’s look at how these figures change from one year to the next. This approach helps smooth out short-term fluctuations and highlights more meaningful long-term trends. You can see in the chart below, that once we examine the year-over-year change we start to elicit a stronger relationship. It seems that in the long term, there may be a relationship worth examining here. Notice in the chart below, we see an enormous 2000% decrease in the RPP. This steep decrease seems unusual, but it is simply due to changing from a near zero value to around -6, in our real values (6 divided by 0.3% = 2000).}

_{Next, we’ll look at exactly what the correlation looks like with different lags. In other words, we want to know how good of a leading indicator of housing affordability is for population growth. Our findings show a moderate connection between changes in housing costs and population shifts, especially with a four-year delay. Specifically, our analysis finds a 0.54 correlation after a four-year lag, meaning our population tends to grow four years after our cost of housing increases.}

_{In simple terms, changes in housing costs today might relate to how the population grows or shrinks a few years down the line. While it may seem counterintuitive, it seems that people are moving to Baton Rouge after the relative cost of housing increases. This could be indicative of other factors, but it seems that we could use regional price levels as one of many useful tools for predicting population growth. It’s important to note that correlation is not causation. However, an argument can be made that an increase in relative housing costs is indicative of the quality of a submarket and the desire to live there. As the quality of living improves, the market becomes even more attractive to live in. This drives up housing costs relative to national averages, while at the same time attracting more people to the submarket in the future as conditions continue to improve; creating a positive “feedback loop”.}

_{Why This Matters for Real Estate Investing}

_{For those investing in multifamily properties, these insights can be valuable. While it would be wonderful to have a crystal ball, sometimes we have to settle for correlations and probabilities. Incorporating correlations and their predictive nature (even if it is not causation) into an underwriting model can provide additional insight into a submarket. Since rent growth assumptions are key to any underwriting model, at the very least, this correlation can’t be overlooked.}

_Conclusion

_{It's important to remember that this analysis, while insightful, has its limits. In recent years, housing costs in the Baton Rouge area have preceded population growth. It’s not necessarily the root cause, but likely a byproduct of a variety of factors leading to an increase in interest in living and working there. Perhaps the correlation is onto something… Amazon plans to open a brand-new fulfillment center in Baton Rouge in April 2024, creating over one thousand new jobs in the area.}

_{Real estate decisions should always be based on a broad range of information. For investors, especially in multifamily properties, understanding how housing costs might influence population trends can be a key factor in making informed and strategic decisions.}

Happy Real Estate!

All the best,

Yuri - Your Real Estate Investigator

Credit: Brian Underdahl, Chief Analytics Officer & Jackson Burks, Economic Analyst Intern

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