JACKSONVILLE, FL – In exploring the Baton Rouge real estate market, we focused on two key metrics: housing costs and population growth from 2009 to 2021. By examining data from the Federal Reserve of St. Louis, we aimed to understand housing affordability through 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, determined by the average prices paid by consumers for a mix of goods and services in each region. Essentially, RPP indicates how housing affordability in Baton Rouge compares to the national average. We then compared this data to population growth in the same area. Initially, the data did not show a strong relationship.

Year-over-Year Change: A Deeper Analysis

To gain more insights, we examined the year-over-year (YoY) changes in these figures. This approach smooths out short-term fluctuations, highlighting more significant long-term trends. The chart below reveals a stronger relationship when looking at YoY changes, suggesting a correlation worth exploring. Notice the steep 2000% decrease in the RPP, which, though unusual, is due to changing from a near-zero value to around -6 in real terms (6 divided by 0.3% = 2000).

Next, we analyzed the correlation with different lags to determine if housing affordability could be a leading indicator for population growth. Our findings showed a moderate connection between changes in housing costs and population shifts, especially with a four-year delay. Specifically, we found a 0.54 correlation after a four-year lag, indicating that population tends to grow four years after housing costs increase.

Understanding the Correlation

In simple terms, today’s changes in housing costs might relate to population growth or decline a few years later. While it may seem counterintuitive, people appear to move to Baton Rouge after the relative cost of housing increases. This trend could be indicative of other factors, suggesting that regional price levels might be a useful tool for predicting population growth. It’s essential to note that correlation does not imply causation. However, an increase in relative housing costs could indicate the quality of a submarket and the desire to live there. As the quality of living improves, the market becomes more attractive, driving up housing costs relative to national averages and attracting more people, creating a positive feedback loop.

Implications for Real Estate Investing

For those investing in multifamily properties, these insights can be valuable. While we can’t predict the future with certainty, understanding correlations and their predictive nature can enhance underwriting models. Rent growth assumptions are crucial in any underwriting model, and this correlation should not be overlooked. Incorporating these insights can provide additional perspectives on a submarket’s potential.

This analysis highlights that housing costs in Baton Rouge have preceded population growth in recent years. This trend is likely a byproduct of various factors that increase interest in living and working in the area. For example, Amazon plans to open a new fulfillment center in Baton Rouge in April 2024, creating over a thousand new jobs, which could further drive population growth.

Real estate decisions should always be based on a broad range of information. For investors, particularly in multifamily properties, understanding how housing costs influence population trends is crucial for making informed and strategic decisions.

For a more detailed analysis and to explore the comprehensive data and methodology behind these findings, read the full article here.

About Nuvo Capital Partners

Nuvo Capital Partners is a niche market-focused multifamily private equity firm operating throughout the Southeastern United States. As a dedicated sponsor (General Partner), we specialize in institutional quality real estate investments within these regions. Our team, with a combined 25+ years of experience, has facilitated over $700M in transactions (10,000+ units). Delivering a transparent investment process, we provide our investors with access to high-quality real estate opportunities, while also ensuring integrity throughout. Our commitment extends to providing monthly, quarterly, and yearly in-depth reporting for our valued investors. To learn more, visit nuvocapitalpartners.com.

If you are interested in learning more about Nuvo Capital Partners and the investment opportunities we are currently exploring, please feel free to contact us here.