Does Price per Square Foot Matter?

Many agents like to advertise the price per sq foot (PP) their listings receive upon sale. This makes sense – it is an easily understood way to trigger potential sellers into imagining the sale price of their own home at that number. Jane Blow down the street got $1100 per square foot for her home. Mine is 2650, so that means at least I can make almost 3 million dollars!

Maybe…but maybe not.

There are many reasons for PP variation, with the most common being location, lot size, home size and home condition. The existence of unpermitted work can further distort this already delicate balance. In some regards, I find it a useful measure, particularly when comparing it to current construction and land costs. However, PP can also be very deceptive, especially as an average.

My take on the current market in Lafayette, CA, is that homes of quality are still selling at decent, even impressive, PP while homes which are less desirable (for whatever reason) are inspiring buyers to negotiate rather ruthlessly compared to what was customary a year ago. However, when it comes to considering a high-priced purchase, a gut check in the form of data is highly recommended.  Therefore, I compared the sale price of single-family homes (SF) sold in the last 30 days with the homes sold in the same period a year ago.

	2021	2022	Variation
SF Sold	26	19	72%
High Price	4,420,000	5,600,000	126%
PP of high comp	983	899	90%
Low Price	1,100,000	1,120,000	101%
PP of low comp	754	432	56%
High PP	1210	1347	110%
Low PP	562	432	76%
Average PP	825	791	95%
# Above 1K PP	5	5	No change
Number Below $700 PP	5	6	Plus one
% Sold above 1K	19%	26%	Up 7%
% Sold below $700	19%	32%	Up 13%

 

If we look at the average PP, very little has changed. What is so bad out there when the average market PP for SF has only dropped, on average, about 5%, not the catastrophic 15-30% drop often heralded by the press? Additionally, the lowest priced entry level home increased by 1%. That is the deception of the average.

To me, the data tells the tale of a bifurcated market.

The first is the robust top of the market. The highest PP is up a full 10% this year. In addition, the percent of the market selling for a minimum of 1K PP has increased from roughly 19% of the market to about 26% of the market, an increase of almost a third. Finally, while the PP of the highest priced comp is down 10%, it is nowhere the nearly 50% decrease at the other end. This is no collapse.

It is the bottom of the market which is seeing some significant pullback in terms of PP. The lowest PP in 2022 is only 76% of what it was in 2021 during the same period. In addition, the number of homes selling at less than $700 PP increased despite the total number of homes sold decreasing. In terms of market share, this is an increase of over 60%.

What is has rapidly increased, per the data, is price variation. The spread between the lowest and highest PP in the 2021 period described above was $648. In 2022, during the same timeframe, it was $915. This increase of over 40%.

The data supports the conclusion that with a slower, more deliberate market bargain hunters have been able to sharpen their blades and drive down prices on the low end of PP. Still, due to a very tight inventory, desirable properties are still inspiring competition PP comparable to last year. As a result, the average is staying roughly the same despite a distinct increase in the spread in PP.

Traditionally, has it buyer beware. Right now, when the spread is so large between the potential outcomes in PP at sale, sellers ought to be cautious as well. It is not the prospect of selling for a high PP which has flown the coop – it is the guarantee which has dissipated.