It’s really about size, quality and location

By: J. David Chapman/October 17, 2019

I am sitting in Red River, New Mexico, with an unbelievable view of the Carson National Forest out my front door and the quaint ski town of Red River to the right off my porch. We own a resort property here, where 15 years ago we built a “tiny house.” We call it the outback and our family and friends stay there when the resort property is full. We did the tiny house before tiny houses were even a thing.

I was in there checking on the outback today, and it confirmed a topic I’ve been considering for months. I am growing less satisfied and more concerned with the use of price-per-square-foot, or PPSF, valuation. When I started in real estate years ago, we were not reliant upon PPSF to value property, but, in the last decade, Realtors have nearly used it exclusively to value real estate.

Consumers have become trained by real estate professionals and HGTV to throw PPSF figures around and are even making offers stating pricing based on the PPSF of “comparable” properties. This has conditioned builders to build larger homes, spreading fixed costs across a larger square footage. While I understand the phenomena, I want to challenge this mentality. The PPSF mindset, by its nature, makes larger homes appear more financially desirable.

A quick check in historic home sizes confirms the desirability of larger homes, or at least the appeal of homebuilders to build larger homes. The 2016 U.S. census states that the average square footage of new homes is approximately 2,598 square feet. This average house size has increased by more than 1,000 square feet in the last 40 years. This appears to be changing with 2018 census data showing average square footage for new single-family homes declining slightly to 2,555 square feet.

What if consumer preference is changing and homebuyers start preferring small homes? This preference for smaller homes is likely to have a huge effect on the price-per-square-foot of those homes. The PPSF method of pricing is already questionable because of the new homes built on smaller and in-fill lots in urban areas, forcing home square footage to be divided by less land square footage. This will even be more exacerbated by smaller home square footage, causing even more questions about valuation.

J. David Chapman is an associate professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).