Price Per Square Foot in Real Estate: When Data Makes Us Less Informed

This article was originally published on Geek Estate Blog:

As professionals, we’re often as fascinated by real estate statistics as consumers are. Price per square foot is one of the metrics that is frequently quoted in attempting to value homes for sale, and it has become a ubiquitous stat on real estate websites.

While it’s an interesting piece of data in an online listing, frankly, it’s a waste of time. Price per square foot is a number that boils down dozens of unique factors in a house or condo and attempts to bundle them into one tiny package. Unfortunately, all it really does is instill a false sense of confidence. It takes away all of the unique, broad, and interesting features of the home that allow us to effectively evaluate its worth and instead melts them into a beige, unremarkable mass.

Price per square foot is the equivalent of putting a cheeseburger, fries, and Coke into a blender and trying to charge $5 for the resulting “Happy Meal”. To lean on it as a means for supporting a valuation is lazy. It ignores view, geographic orientation, floor plan, upgrades, nearby amenities, and property condition and gives the impression that it can encompasses them all with a single number.

As real estate agents, we often struggle to explain this to our clients. They feel more informed when websites are crunching data into these easy-to-digest figures and often think we’re being disingenuous when we tell them to ignore statistics like price per square foot when evaluating a home for sale.  It seems illogical that this new information might actually be detrimental to their ability to evaluate a home, but unless they’re buying an entire neighborhood at once, it often is.

Let me give a quick example that might help explain this for the consumers most likely to use the price per square foot measure–condo buyers.  Condos in the same building are theoretically the most similar homes in terms of location and style and should measure up comparably.

I pulled 44 sales in Seattle’s Escala condo building from the first half of 2012, and measured their price per square foot against floor number–just one of the many factors that could illustrate the ineffectiveness of this valuation strategy.

** Yes, this is a very old Microsoft Excel chart ;) **

Seattle Condos Price Per Square Foot

The first conclusion is fairly obvious:  If we used price per square foot to compare one condo to another for value, we might be under $350/sq ft for one condo and over $650/sq ft for another.  Averaging those numbers around $500/sq ft would still make valuations of some condos on lower floors and higher floors off by over 40 percent.

If we took the floor of the condo into account and only compared “nearby” properties to one another, the trend line of the numbers might seem to make more sense in the aggregate.  For the individual home buyer, though, the resulting valuation could be still be remarkably inaccurate.

There are condos on the 2nd floor that sold for higher price per square foot valuations than some on the 10th floor.  A condo on the 20th floor sold at a lower rate than one on the 9th floor.  Condos within one floor of another often have sale prices that deviate up to $100/sq ft from one another, up to a 30 percent margin of error.

While the overall price per square foot trend is upward as the floor number rises, clearly any individual condo cannot be reliably compared to others in the same building using price per square foot.  The floor number is just one way of illustrating the inefficiency of the measure.  We could easily produce similar charts for condos facing East vs West, or those with views of a lake vs. a city.  We could show that the upgrades in the home, the proximity to a desired amenity or a noise nuisance, or even the access to elevators and parking spaces will all affect the home’s value in a way that makes aggregated averages so inaccurate that they’re often not worth even considering.

Establishing the true value of a house or a condo is not a simple task, even if we’d like it to be.  The more we attempt to ease the process by boiling together the unique and interesting qualities of a piece of real estate, the less effective our valuations of that real estate are.  Statistics often only tell a small part of the story, and in this case, price per square foot tells us very little at all about a home’s true value.