PRICE PER SQUARE FOOT
Prices have been falling in the Metro Phoenix real estate market because of foreclosures during 2006-2009. We hear it reported quite regularly. Most reports focus on the average sales price instead of the price per square foot. Why? It's the easiest index to use. Just add up the prices of each "sold" home and divide by the total number sold. No fuss ... just a simple number to obtain. But -- should you base your metropolitan Phoenix area real estate market forecast only on that number? Let me show you why not.
On a "street" level this is really easy to understand. Let's say 1234 Main St. sold for $250,000 in March of 2008. 1256 Main St. sold for $220,000 in April of 2008. An alarmist who lived on Main Street might say "the sky is falling!" At first glance it appears values dropped $30,000 in one month. However, when you learn that the $250,000 house was 2,500 square feet and the $220,000 house was 2,200 square feet ... that assumption is no longer valid. In fact, both homes sold for $100 per square foot.
Here's a second example: The average price of a "sold home" in the Metro Phoenix real estate market city of Mesa in December of 2007 was about $242,000. In January 2008 the average sales price was about $254,000. Are prices rising? Are foreclosures drying up? Here's the rest of the information: in December the average house was 1,737 square feet and in January the average house was 1,849 square feet. That equals $139 per square foot versus $137 per square foot -- or a drop of 2 dollars per square foot from December to January. You see the point. Numbers by themselves do not tell the whole story. It is important to compare apples to apples.
The Town of Maricopa in the metropolitan Phoenix real estate market is the third example of this. Over a 5-month time period during 2008 the average sales price of a home dropped from $193,045 to $163,129. That's bad enough, right? BUT ... as houses get more affordable people are buying bigger homes in that community. Are you ready to break out your calculator? Here goes: the homes that averaged $193,045 also averaged 2,069 square feet. The homes that averaged $163,129 also averaged 2,314 square feet. That's a 245 square foot larger home and an "average" price decrease of $30,000. So, is that an accurate depiction of the average price considering the homes are larger?
Have you completed the math? If you didn't have a calculator the answer is $93 per square foot versus $70 per square foot. That $30,000 drop in price was actually a $23 price per square foot drop. This also means the most current, average sales price in the Town of Maricopa can also be expressed as $70 per square foot. Now, apply that number to the 2,069 square foot home that sold for $193,045 5-months prior and the adjusted, current price just became $144,830. In other words, the 2,069 square foot home bought for $193,045 just 5-months ago would cost $144,830 later in the same year. That huge $30,000 decrease just blossomed in to a potential $48,000 decrease over a 5-month period. It's important to use price per square foot to get an accurate Phoenix area real estate market forecast.
You can do the math another way with the same result. We know that $70 per square foot is the current sales price in the Town of Maricopa. We also know that the most recent sales have been an average of 245 square foot larger. $70 X 245 square feet = $17,150. $17,150 plus the apparent $30,000 price drop = about $47,000. The numbers do not match exactly in this equation because the average square foot numbers I used were rounded to the nearest whole number.
If that math makes your head hurt, imagine how your head would hurt if you owned a house in the Town of Maricopa. Imagine seeing forclosures lining your streets. Anyone can do this math. It's not trigonometry or quantitative analysis. Doesn't it seem more reasonable to consider price per square foot? What do you think?