The real estate industry standard for determining how a market is performing is the median home price or in some places the average home price. You hear it everywhere, median home price falls in first quarter, median home price for Salt Lake City is… But is the median home price a true indicator of how a market is performing, or would we be better off using something else, for instance the price per square ft.
Let’s look at a specific example. In June 2007 the Salt Lake County real estate market peaked with a median home price of $234,000, in April 2009 the market hit a low of $211,250, which was a fall of 9.72%.
Now if you are trying to sell your home or if you are in the real estate business you will know that the market has fallen much more than 9.72%, but what can we use to determine the actual market decline? That’s where price per square ft. comes into play.
During a real estate downturn people don’t necessary spend less money buying a home, they just buy a bigger home, or buy in a nicer area. Using this logic if someone purchased a home for $300,000 in April 2009, they would have got a substantially bigger home than if they purchased a home for $300,000 in June 2007. Unlike the median home price, the price per square foot takes into account the size of home and provides a much more actuate indicator to how the market is performing.
If we look at price per square ft. values for June 2007 and April 2009 we find that they went from $130 to $100, a decline of 23.08%, which is much more in line with what we are seeing in the marketplace.
You may ask, if price per square ft is that much better, why are median home prices still used? The answer is probably because people find it easier to relate to a median home price. If you tell someone the price for homes in their area is $130 per square ft, they will almost certainly look at you funny.