We are often asked why we focus so much on price/square foot instead of average or median sales price when performing our market analysis. This is definitely a good question especially since the whole industry and most real estate professionals use the average sales price measurement. We are most assuredly in the minority here, but there is a good reason.
When it comes to supply (homes on the market) and demand (homes sold) there is little difficulty, as these indicators are straight forward unit statistics easily obtained and measured. However, pricing is another matter as some average must be used and all averages can swing dramatically in a short term context. For example, the average sales price in a given area can swing wildly up in a month when just a few luxury homes are sold.
Pricing per square foot falls victim to this same phenomenon, however it swings much more moderately. Just take the simple case of two homes, one selling for $450k the other $250k yet both sell at $103 a square foot. Why the higher price? …One home was simply much larger than the other but in actuality they sold for the same pricing factor.
A much better and real world example can be taken from our recent market brief for the Southeast Huntsville area. By looking at the pricing chart it is evident that the month to month price swings using the square foot metric swing as much as 12% but the average sales pricing over the same yearly time frame swings as much as 35%. Was there any price appreciation in this area over this 12 month time frame? Using average sales price would indicate a large price appreciation greater than 10% yet the beginning and ending price utilizing the square foot measurement yields an appreciation of ~1%. We use square foot pricing simply because it is less prone to the natural price swings in the market and in our opinion is a better indicator of apples to apples pricing.
In conclusion, it is not very effective to use any average within a short term or monthly year over year context. This is why we always attempt to show pricing within the context of at least a year’s worth of data along side a another 12 month moving average as exemplified in our North Alabama MLS March Market Brief.