The cost per square foot, often touted as the ultimate measure of a property’s value, has established itself as a familiar and frequently misleading metric. Like many supposedly simple measures, it can be deceptively complex.
Just like cereal costs less per ounce the more you buy, it tends to cost less per square foot for the more house you buy. It’s the real estate version of getting a deal on bulk items. But why is this the case, and what does it mean for the homebuyer? Here’s my take on why your home’s price per square foot may not be as telling as you think.
Crunching the Numbers: The Real Cost of Home Building
The idea of the size-to-cost ratio can be a bit puzzling at first glance. After all, doesn’t a larger home require more building materials, labor, and land? Indeed it does, but certain fixed costs remain relatively stable no matter the size of the home.
The Anatomy of a Cost
To truly grasp this concept, it’s essential to recognize the foundational elements of home costs. When a new home springs from a vacant lot, it doesn’t just materialize as a whole. Builders erect a skeleton, install systems, and clothe it with all the features and finishes that make it a home.
From the Ground Up
The cost of the land, the utility hook-ups, and the driveway serve as the canvas of home construction. These ‘invisible’ contributions carry a price tag but contribute little to the square footage measure.
The Vital Organs
HVAC systems, plumbing, and electrical are the circulatory and nervous systems of a home – often expensive to install and repair but again, not incorporated into the cost per square foot despite being essential.
The Parlor and Pantry
Kitchens and bathrooms are considered the prime spots for upgrades, investing in these areas has long been considered a boon to resale value, yet the cost per square foot barely shifts.
Debunking the Price Per Square Foot Myth
Here are four things to keep in mind when considering this figure:
- The Spectrum of Prices in a Neighborhood: When calculating the average price per square foot for your area, you might find a wide range within your own neighborhood. Different factors, including demand, views, and even historical sales, can greatly influence this range.
- Similar Houses, Similar Price per Square Foot: When homes share a similar size, location, and other basic features, they tend to have a similar price per square foot. However, anomalies can arise when homes differ significantly in upgrade quality or condition.
- How Property Characteristics Shift Price per Square Foot: Even within the same size and layout, variations in amenities, condition, and lot size can alter the price per square foot significantly. These variations often explain why seemingly similar homes can have markedly different asking prices.
- Multi-level Homes Impact the Price per Square Foot: Below-grade (basement) square footage is usually calculated at about 1/2 of the above-ground sq ft numbers on appraisals. Additionally, snd stories (or higher) are also de-valued on appraisals compared to the “main level”
True Home Value Goes Beyond a Single Metric
While the price per square foot is a useful starting point for evaluating a home, assessing value means looking at the bigger picture. Pay attention to the prices of comparable homes in the market, and factor in all the nuances of your specific property.
The Cereal Box Model In Action
By viewing the cost of homes through the cereal box model, you may gain a new perspective on square footage as a measurement of value. The larger the box, the less you tend to pay per ounce.
Next time you’re in the market for a new home, remember that size doesn’t always equate to a higher price tag. In considering the value of a home, the cost per square foot is just one Cheerio out of the whole box. When you understand the dynamics of what truly influences prices, you’ll be better equipped to find the perfect home at the perfect price.