Let’s look at a couple of examples:
Two homes cost $300,000. One is 2,000 square feet (sq. ft.) while the other is 4,000. Although the sales prices are identical, the PPSF is $150 for the 2,000 sq. ft. home and $75 for the 4,000 sq. ft. home.
Sales prices on two properties in two markets can be significantly different, while the square footage remains fixed. If the sales prices increase from $200,000 to $400,000, but the square footage is fixed at 3,000 sq. ft., then one home costs $66.67 per sq. ft. and the other costs $133.33 per sq. ft.
The How: PPSF “standardizes” or “normalizes” home price data by home size by dividing the sales price by square footage. This keeps everything relative. As such, it’s a much better measure for consumers to truly compare two different local submarkets, or even different segments within a single area.
Even though the median and average price measures may be wildly different, PPSF could actually be the same. Or, conversely, if median or average sales prices are identical or similar, but home sizes are very different, PPSF can draw attention to important differences for buyers to consider.
PPSF is also more insulated from changes in neighborhood character – particularly in areas with a high market share of new construction, whether infill or greenfield redevelopment. If the average square footage in a metro, city or zip code is rising, it’s likely that the median sales price is also on the rise.
But PPSF will not necessarily be on the rise. PPSF could remain static, but if home sizes go from 2,000 to 2,500 sq. ft., then prices will likely move up as well.
The Oops: The sales price of a house is merely one measure of the cost, and anyone doing cost analysis would be unwise to focus strictly on median or average sales price. PPSF is an important pricing metric that is too often overlooked.
The Beauty: Variability in home finishes, structural condition, school district, neighborhood, special assessments, tax liens, roof age and other considerations all play into dollar value, which doesn’t necessarily reflect true “value.”
We’re not talking about assessed, appraised or even PPSF bang-for-the-buck value, but rather the extent of warm and fuzzy satisfaction felt by the next owner.
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