Forget the "average price" - price per-square foot is the real indicator

Everyone reports on the average sales price. Why?  It's the easiest index to use. Just add up the prices of each "sold" home and divide by the total number sold. No fuss ... just a simple number to obtain. We have been seeing the average price fall, largely due to foreclosures. We hear it reported quite regularly. But -- should you base your market decisions only on that number? Let me show you why not.

On a "street" level this is really easy to  understand. Let's say 1234 Main St. sold for $250,000 in March of 2008. 1256 Main St. sold for $220,000 in April of 2008. An alarmist who lived on Main Street might say "the sky is falling!" At first glance it appears values dropped $30,000 in one month. However, when you learn that the $250,000 house was 2,500 square feet and the $220,000 house was 2,200 square feet ... that assumption is no longer valid. In fact, both homes sold for $100 per-square foot.

Here's a second example: The average price of a "sold home" in Mesa in December of 2007 was about $242,000. In January 2008 the average sales price was about $254,000. Is the slump over in Mesa? Are prices rising? Are foreclosures dryin up? Here's the rest of the information: in December the average house was 1,737 sq ft ... in January the average house was 1,849 sq ft. That equals $139 per-sq ft versus $137 per-sq ft  -- or a drop of 2 dollars per-square foot from December to January. You see the point. Numbers by themselves do not tell the whole story. It is important to compare apples to apples.

The town of Maricopa is the third example of this. Over the past 5-months the average sales price of a home dropped from $193,045 to $163,129. That's bad enough, right? BUT ... as houses get more affordable people are buying bigger homes in that community. Are you ready to break out your calculator? Here goes: the homes that averaged $193,045 also averaged 2,069 sq ft. The homes that averaged $163,129 also averaged 2,314 sq ft. That's a 245 sq ft larger home and an "average" price decrease of $30,000. So, is that an accurate depiction of the average price considering the homes are larger?

Have you completed the math? If you didn't have a calculator the answer is $93 per-sq ft versus $70 per-sq ft. That $30,000 drop in price was actually a $23 per-sq ft drop in price. This also means the most current, average sales price in Maricopa can also be expressed as $70 per-sq ft. Now, apply that number to the 2,069 sq ft home that sold for $193,045 5-months prior and the adjusted, current price just became $144,830. In other words, the 2,069 sq ft home bought for $193,045 just 5-months ago would cost $144,830 today. That huge $30,000 decrease just blossomed in to a potential $48,000 decrease over a 5-month period.

You can do the math another way with the same result. We know that $70 per-sq ft is the current sales price in Maricopa. We also know that the most recent sales have been an average of  245 sq ft larger. $70 X 245 sq ft = $17,150.  $17,150 plus the apparent $30,000 price drop = about $47,000. The numbers do not match exactly in this equation because the average sq ft numbers I used were rounded to the nearest whole number.

If that math makes your head hurt, imagine how your head would hurt if you owned a house in Maricopa. Imagine seeing forclosures lining your streets. Anyone can do this math. It's not trigonometry or quantitative analysis. Doesn't it seem more reasonable to consider price per-sq ft? What do you think?

Comments

[Mark]

I see your point. That make it more difficult for us consumers who don't have access to the MLS.

[Cory]

Thanks. This is an excellent post. It is a perspective we never hear about.

[philippines property]

Nice article, new perspective in real estate.. Actually, i don't really care on per-square foot price and only rely on averaging the price.. thanks for the post, it opened an idea for me..

-david