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.

  3. AlanW says

    From looking at your graph, and running a straight line through the middle of the dots, and extending that line to the left where it hits the Y-axis, a rough calculation is a price-per-square-foot of about $70 times the number of square feet, PLUS a base price of about $85,000. So, a 1,000 square foot home is about $155,000 (1,000 x $70 = $70,000 + $85,000 = $155,000), which close to the top LEFT-most dot on your graph, and a 5,800 square foot home is about $491,000 (5,800 x $70 = $406,000 + $85,000 = $491,000), which is close to the top RIGHT-most dot on your graph.

    Do you agree?

    If so, can I think about the $85,000 as essentially the price of a lot zoned for a single family detached home (regardless of lot size)? It doesn’t vary much based on lot size because you can only build one single family home on it, and having more land is only marginally more valuable to a homeowner. Can I also think that the $70 per square foot is essentially the price to build a new home of average quality for that area (probably depreciated somewhat by the age of the home), independent of the price of the land?

    My belief is that if a homeowner could buy in the Anatolia neighborhood of Rancho Cordova an empty lot zoned for a single family detached home, and build a custom home of average quality (for the homes in the Anatolia neighborhood of Rancho Cordova) for about $70 per square foot, then they would do so.

    If you have any thoughts on this, I would like to talk more.

    • says

      HI Alan. Thank you for checking in. I appreciate your methodology and I like what you’ve done, but deducing lot size based on one graph is maybe a stretch (for me at least). This graph is of course about seven years old, so it would be interesting to see a much newer one. If the numbers did work this way, it would probably be more realistic for a buyer to purchase a lot and build a larger home because it effectively is less expensive per sq ft to build larger homes (especially 2 story units). Builders buy land in bulk and they build in bulk, which is why their numbers are able to work well. I would guess many regular buyers do not have the resources and crew to pull off new construction at the same expense as the builder. Values actually declined since this post in 2008 and have since increased, so we may be looking at completely different numbers. Actually, I would say values are higher than they used to be in 2010 since current values are typically more consistent with 2007/2008 values (and values declined from 2008 to 2010). I wanted to mention this because when we see values increase, it is often land value that is the real culprit behind the increase. Thus land is more expensive now. Of course we all know construction costs have increased too.

      Any thoughts?

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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