Is price per square foot an accurate way to measure the value of a house?

Home owners ask me sometimes about the average price per square foot for their neighborhood. Honestly, I pay attention to the price per sq ft as one of many real estate metrics, but it’s not the end-all solution to valuation by any means. Let me illustrate my point by presenting a graph of all sales in the Anatolia neighborhood of Rancho Cordova over the past twelve months.

Over the past 90 days Anatolia has had an average price per square foot of $103. If Joe the Home Owner then took this figure and applied it to his home, let’s see what he comes up with. Imagine he has a house at 1000 square feet. In theory, Joe’s house should be worth $103,000 (1000 x $103), but the graph shows homes at 1000 square feet sold between $140 to $150 dollars per square foot actually. Let’s look at 2000 square feet. It looks like $103 works very well for some houses, but other properties at 2000 square feet clearly sold closer to $250,000 (that would be $125 per sq ft). Let’s look at even larger homes. Many 4000 square foot properties sold well under $103 per square foot, and houses around 5,550 square feet sold closer to $81 per square foot ($450,000 / $103). 

As you can see, an average price per square foot figure is not constant for all houses in a neighborhood. Simply multiplying your square footage by the average price per square foot for your area, city or zip code may or may not work, and will very likely not give you an accurate number.

Question: When looking at the graph above, what size of home do you think might give you the best return on your dollar?

Comments

  1. says

    Great Post Ryan. I get the same question all of the time. It is funny, I use to work in Metro Atlanta where, at the time, no one talked or asked about cost per square foot. The market I am in now, everyone asks about it. It is funny to see the how things are different in different markets. Is price per square foot an accurate way to measure the value of a house? No! It might be good to calculate and use to make some generalizations about the market but it by no means should be relied upon.

    • says

      It must be interesting to go from one market to another and observe similarities and differences. I think it would be very interesting to trade places for a week too in order to get a glimpse of what it is like to appraise on the other side of the United States.

  2. Donna says

    Thanks for this great post. I’ve only had one experience as a buyer (though I grew up w/ a fam who invests in real estate), but I am an analyst, and I think this is useful info graphed out well. I am actively looking at homes, and while PPSF is definitely a factor in my decision, it is only one set of data to consider. In appraisal, much like analysis, you have hard figures to factor (PPSF, improvements, lot size), but then you have subjective things like floorplan, resalability, and landscaping.

    Your graph did help me to see that I get better resale with the middle homes in the neighborhood. It goes along with the old real estate adage that one should never buy the nicest place on the block.

    • says

      Thanks, Donna. I appreciate it. I think you’re so right when you said, “It goes along with the old real estate adage that one should never buy the nicest place on the block.” We like bigger and better things, but B&B isn’t always better in real estate for the resale market.

Trackbacks

  1. […] Here is a spectrum of price per square foot for all sales in Rancho Cordova (95670) over the past year. Remember though, don’t just take your square footage and multiply it by the average price per square foot. That’s not always the best idea to determine the value of your house. See my previous post entitled “Is price per square foot an accurate way to measure the value of a house?” […]

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