Two types of averages are most often used to measure trends and to valuate real estate, average sale price and average price per square foot.
Average Sale Price is primarily used to track general trends. It’s calculated by dividing the number of properties sold by the sum of the closed prices. While tracking this number over time is often used to illustrate trends and provide a point of reference, it can sometimes be misleading as an indicator of value changes.
For example, the year-to-date average sale price in Rochester dropped from $404k last year to $398k through October of this year. While the change would suggest Rochester values have dropped in the past year, that’s not the case. The drop in average price was simply the result of a higher number of smaller homes selling in lower price ranges while the number of sales in other price ranges was about the same as last year. This year’s drop in average price was the result of 14 more below-average sales priced under $400k.
Despite the drop in average sale price, Rochester sales are up 11%, price per square foot is up 4% and average market times dropped from 79 days last year to 49 days this year. Values and market activity have been up.
Average Price Per Square Foot ($/SF) is frequently used for both measuring area trends and for pricing. For urban and suburban markets where lots are more uniform in size and value, tracking price per square foot is usually the best method for describing value trends. It provides a more accurate average value by adjusting for fluctuations in the mix of sizes of homes sold.
Average price per square foot can also be used to show representative values within price ranges (i.e. between $200k and $400k). Average sale price cannot be used within price ranges because the selected price range predetermines the result—the average price of a $200k to $400k home will always be between $200k and $400k.
When broken down to smaller areas and price ranges, shifts in price per square foot more accurately measure local value trends that affect individual properties. Local and price range price per square foot trends get closer to answering for both sellers and buyers, “How does this affect me?”
In most urban or suburban areas, average price per square foot is also the most effective starting point for valuing a specific property. That’s why appraisers and investors rely heavily on it.
Calculating an average price per square foot from a sample of 5 to 25 comparable properties and then making adjustments for the location, condition, layout and time will usually produce a more reliable pricing tool than just looking back at 3 or 4 comparable properties. More points of reference can help to more accurately hone in on value. They also show the direction and pace of market movement.
When choosing properties to include, the more alike the properties are, the more accurate the pricing will be. Lot locations and dimensions should be as similar as possible and house size should be within a 10% margin (i.e. if the subject is 2,000 square feet, the comps should be between 1,800 and 2,200 square feet). The key is to start with a good representative sample. Then fine-tune with appropriate adjustments. Rarely is the subject exactly “average.”
With some practice and proper use, you will find price per square foot to be a powerful tool for describing both area trends and pricing.
Inventory has been down all year and will continue to be down heading into 2018. Year-to-date sales have been lower in units, but values have been up an average of 6% for both average sale price and price per square foot. The best listings will continue to receive quick and high offers, while others sit a little longer. Moving toward year-end, sales and average price will drop off with fewer active buyers and available prime listings. Higher-end properties will continue to have market times two or three times longer than moderate and lower-priced homes.