Price per square foot is a ratio often used to evaluate real estate prices. It can be an extremely informative metric, as it allows for a comparison of two properties that vary slightly as to the relative amount you are paying for each square foot of house you are getting.

Notice I said you can compare properties that vary SLIGHTLY. While a variety of real estate “experts” will throw out price per square foot numbers to show you how much of a deal you are getting on a particular piece of property, it is always important to make sure you are comparing apples to apples. The price of any home selling in a particular area isn’t simply a function of the size of the house. There are a huge number of other variables to take into consideration. For instance, it certainly wouldn’t make sense to compare a brand new house to an old fixer-upper simply by their price per square foot. If you did, it might seem that you were getting a terrific deal on the fixer property.

Furthermore, price does not usually vary linearly with square footage. This sounds complicated, but it basically means that price doesn’t go up in a straight line as you increase square footage. (See graph below, showing the relevant data for homes sold in the 94080 zip code in the past 9 months.) What this means to a buyer is that the amount you pay for each additional square foot is more on the smaller end of the scale and less as you move up the size spectrum.

What does all this mean? It means that price per square foot should only be evaluated on an apples to apples basis. Call Cirios to help decide what’s an apple, what’s an orange and what’s just a plain lemon.

This entry was posted on Tuesday, June 2nd, 2009 at 12:04 pm and is filed under Cirios Trends. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.