Realtors, developers and the buying public have a foot fetish.
In almost all walks <pun alert!> of real estate life, people ask the question about the number of feet in a home. Of course they are referring to SQUARE feet in the home (not ACTUAL feet) in an attempt to be able to draw a conclusion on pricing using size as the primary consideration. Generally speaking, after asking ‘how much is the home?’ the next most common question asked is ‘how many square feet are in the home?’
We are a market obsessed with feet.
Lost in the question of a home’s price per square foot (which is seeking to establish a relationship between a home’s size and its price), is what does this question really answer? How large a home may be is a very valid question, but in reality, using the size of the home as the primary gauge of its value is not very accurate unless the other comparable homes are similar in scale, age, location and finish level. While even appraisals reference ‘Price Per Foot’ as part of the Uniform Appraisal Report, the statistic generally leads to more incorrect decisions than correct ones.
Lets take a closer look.
Comparing “Price Per Foot” (from here on out we will call it PPF) in the Aggregate
In 2013, combining the 23220 and 23219 zip codes (Fan, Jackson Ward and Downtown), there condominium sales (on a ‘per foot’ basis) have varied from:
- Low of $73 per SF
- High of $324 per SF
- Average of $193 per SF
The high end of the range is nearly 5 TIMES HIGHER higher than the low end of the range. Likewise, the highest per foot sale is 67% HIGHER than the average sale ($193/SF). If one were to use the PPF analysis to seek to establish a range of possible values for a 1,000 SF condo in the marketplace, it would be worth somewhere between $73,000 and $324,000. Obviously, that is not overly helpful.
Compare this to single family homes in Western Hanover and you find a strikingly similar spread:
- Low of $55/SF
- High of $206/SF
- Average of $117/SF
The high end is approximately 400% higher with an average closer to 60% less than the high end.
Most of the real estate zones had similar spreads between high and low.
As you can tell, using this metric when looking at sales in the aggregate, you really cannot tell very much other than a very rough estimate of housing values.
Comparing PPF by Project or Subdivision
Since 2012, sales at the Vistas condominiums at 301 Virginia Street in Downtown/Shockoe have the following characteristics:
- Low $224/SF
- High $370/SF
- Average $294/SF
While the banding has decreased in width, the spread of the data is still too wide to really garner any true guidance.
The mature neighborhood of Windsor Farms is also scattered:
- Low $150/SF
- High $303/SF
- Average $222/SF
However, in Twin Hickory, we begin to see the results differ and become real:
- Low $108/SF
- High $174/SF
- Average $136/SF
When you see close proximity to the average and either the low or high end, you know the data is centered a lot closer to the average with fewer outliers. This is usable data upon which to base some decisions.
Why does it change?
Twin Hickory is a far more homogenous neighborhood than those with considerably more age (Windsor Farms, The Fan, Ginter Park) or those in a more diverse vertical market. Architectural controls instituted by the county (via the developer’s covenants) meant to protect values and set minimum standards depress variance and create a greater degree of similarity of home sizes and features. Also, holding construction materials relatively constant, the land value becomes the primary driver of variance. The difference between a lot in one section of Twin Hickory is generally pretty similar to those in other sections.
Now watch this…
In Milestone (Central Hanover County), we see the following band:
- Low of $104/SF
- High of $129/SF
- Average of $112/SF
The characteristics of Milestone are even more homogenous than Twin Hickory. Milestone is purely single family neighborhood with no patio homes, town homes or ‘zero lot line’ sections. The multiple sections of Twin Hickory vary (at least more than Milestone) in size and scope with some designated to be nicer than others. The Park Commons section of Twin Hickory, as an example, is an ‘Empty Nester’ targeted development touting zero exterior maintenance. Comparing Park Commons (or Cobblestone Landing) to the more luxurious Harvest Glen section, while both within the Twin Hickory master development, will not yield an accurate or fair comparison.
Ultimately, understanding what ‘Price Per Foot’ has the capability of measuring accurately is the key. Simply asking about the ‘PPF’ in an area without defining the true data you seek to measure will lead you astray. The higher the degree of similarity amongst the data (age, features, location) the better the tool of PPF becomes.
If you grasp this concept, you will have taken a large step forward…