Using PPSF as a value measure

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Submitted by Jack on June 17, 2008 - 7:12pm

Is anyone using Price Per Square Foot as a measure to figure out a house's value? I know it's not the only measure to consider, but as an analyst I'm more about the numbers and trends and find those easier to work with.

For example, I know that you could not expect to compare a 1,500sqft super upgraded SFH with a 3,000sqft SFH with minimal upgrades, if any, in different neighborhoods (especially if one is 20 years older).

BUT, what if you were comparing a 1,500sqft SFH with a 2,500sqft home, both were built in the same year, have similar upgrades, are on the same street, and are part of the same HOA...then couldn't you justify using the PPSF of one of them that recently sold to at least get a ballpark estimate? For example, if the larger home closed within the last month for $300/sqft and the smaller is selling for $350/sqft, would it be fair to say the smaller home is overpriced? Assuming the larger home has a larger yard, and more bedrooms, would it be fair to say that the smaller home should be priced at no more than $300/sqft?

Submitted by FormerSanDiegan on June 17, 2008 - 7:46pm.

If the houses are otherwise similar (similar upgrades, built around the same time, same size lot, same street, etc) then the smaller house should ALWAYS be more per square foot.

Here's why :

SFR real estate has two components:
1. Structure
2. Land

In San Diego the Land typically accounts for 30% - 70% or more of the real estate value.

So, let's do a thought experiment ...

Take a plot of land that costs 150K and consider it with a 2500 square foot house. The structure might be worth 375K in its current condition.

Now consider another structure instead, this time 1500 feet. This one is the same quality and make up of the 2500 sf place so in its current condition is worth roughly the same amount per square foot as the larger structure for a total of 225K.

So, the property with 2500 sf house is worth maybe 525 K, whereas the property with the 1500 sf house is worth maybe 375K.
IN per-square-foot terms, the larger property is $210 per sf where the smaller property is $250 per square foot.

All things else being equal, smaller houses are worth more per square foot as long as the land value is greater than Zero.

Submitted by Ash Housewares on June 17, 2008 - 8:39pm.

Another factor to consider is the number of stories. Most homes I see 2500+ sq ft are two story, most 1500sq ft homes are one story. The two story home has "dead space" where the staircase is that is of little use, so its effective sq footage is less than measured square footage. So two 2500 sq ft houses, a one story and a two story, the one story will "feel" bigger because it lacks dead space. This leads to higher ppsf for single story homes.

As for your original question, yes. Rich calculates a median ppsf for condos and homes monthly to use as an indicator of future Case Shiller (sp?) changes.

Submitted by Jack on June 17, 2008 - 9:46pm.

FormerSD, thanks very much for the detailed explanation. That makes sense.

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