Measuring Value: Package Price

In speaking to a client the other day, I realized how much stock many folks are putting into "package price." Package price is the average dollar amount per square foot of dwelling. The price can be arrived at by taking the asking/selling price of a home & dividing by the square footage. This method of measuring value is very common, but more times than not, it is unreliable.

The question my client posed was regarding two different sized homes on the same street. The larger home was approximately 3,000 square feet, the smaller was around 1,800 s/f. The question: Why such a huge difference in price per square foot between two houses located on the same street? It's a great question, and anyone can imagine how this might skew a consumer's view about a particular home as being over-priced/under-priced. There is no shortage of variables as to why package price can differ substantially between two or more similar looking pieces of property. I will attempt to address a few reasons.

First off, in the above example, a 3,000 s/f home & a 1,800 s/f home have nearly too much difference in size to even make a fair comparison. However, for the purpose of illustration, the example is perfect. Typically, when comparing houses of similar style, age, & location, as the gross living area increases, the price per square foot decreases. It's the same principal that governs buying a single can of your favorite softdrink vs. buying a case of 24 cans: The price per can is lower when bought in bulk.

Another more obvious reason is condition of the improvements. Obviously, the better the condition, the higher the price per square foot. This is an important variable with regard to older housing. The higher the actual age of the dwelling, the more condition plays a role in pricing.

The quality of finish/materials in one dwelling versus another is also important to note. The more sophisticated a market, the more important this aspect becomes. Some markets are content with, perhaps, even prefer plush carpeting & vinyl to hardwood & ceramic/granite/marble tile floor coverings. Also, sophisticated markets provide the seller with more opportunity to make a nice return on investing in more expensive materials & finishes. Conversely, a market that does not recognize the value in more expensive quality finishes will not be willing to pay for it, which leads to much confusion and discontent for those sellers who go all out with regard to quality only to have the market disapprove of the results.

Another possible reason for the substantial disparity between the package price of two similar looking pieces of property is functionality. A 3,000 square foot dwelling could have a mess of a floorplan. It could be choppy, or the rooms might have poor placement. A 1,800 s/f house on the other hand might be open, and its floor plan might be so functional that the dwelling actually "lives larger" than its gross living area might suggest. In order to compensate for the lack of functionality of the 3,000 s/f house, a seller must discount his/her package price because the market is not willing to pay the same amount per s/f for disfunctional living space.

It's also important to look at whether a house has a basement or not, whether the basement is finished in any way, and how much land the dwelling has. These are all somewhat hidden features that get figured into package price, and these features probably contribute the most to the larger disparities in package price. For instance, if the typical building site in an area is a quarter of an acre, but a smaller house on just under a half acre is priced above the subdivision's top sale price, its package price may look high when in reality, the value difference lies in the extra land.

I hope whatever I lack in clarity on this subject can be made up by offering to answer any questions on the subject via email. Please feel free to ask away.

The Housing Bubble

Is anyone buying this garbage? I have a cousin in real estate in Southern California, and I recently apologized to him that the appreciation rate out there was going to dip below 30%. Of course I was kidding, but what's so bad about a more stable 15% appreciation rate or 20% or 8%? My question is, what constitutes a true burst of the real estate bubble? A slowing of uncanny appreciation does not. Sure, many will look back at the last five years as the "golden era" of real estate, but in the context of the more expensive financing costs of the previous three decades, it is ridiculous to assume the sky is falling. The cost of home loans remains quite low, and there's little reason to believe that rates will all of a sudden explode upwards of 7% for a 30-year fixed rate mortgage. Even if they do, 7% rates were all the rage at the beginning of the decade & began the home refinance boom. It's still "cheap" money.

I heard a humorous AP report yesterday that housing starts (new construction) decreased by a shade above 5.5% last month. Does this mean the real estate market is doomed? I don't believe so. My response is it's about time. I think some builders will have difficulty selling off their inventory in a relatively short period of time, but this result has more to do with the viability of the building project in an optimal market as opposed to interest rates meandering into the low sixes. Some projects will see longer marketing times, however, such projects probably wouldn't have flown off the shelf even with sub-6% interest rates.

Without question the market is softening, and listings of pre-existing homes are starting to creep upward. This, however, does not signal the end of good returns provided the product being offered is legitimate. In other words, some sellers won't like the return they get because they are used to realizing a certain percentage for substandard quality of work, but in all honesty we reap what we sow. A year ago investors pushed crap, and a willing & able public scooped it up like roses. Now, it's not as easy to make a buck. All in all, this is not bad news for the fairly educated consumer.

The Louisville market in particular has seen some record gains, however, unlike red hot markets such as California & Las Vegas, the discrepancy between gains a year ago & those of today won't feel like much of a difference in the pocket book. The local newspaper, The Courier-Journal, just did a story on the high end home market in Louisville and the recent influx of listings above $1 Million in the market. The article does a fair job of discussing the reasons this segment of the market will likely fill its inventory & experience some difficulty in unloading it. It's a new "problem" in a market that is unaccustomed to this level of pricing. Despite the increased inventory of high end homes, it's not likely that sellers will shy away pricing homes in the million dollar range. The market will do its job in assessing value, and some sellers will be required to lower their prices or stubbornly wait out an accepting buyer.

I couldn't help it...

I initially enlisted my brother to build me a real estate website when I decided to shift my focus from residential real estate appraising to sales, but he took a new job leaving little time for such a small-time web client as myself. So here I am trying this blog thing out.

My name is Chris Thomas. I am a real estate agent with Mulloy Properties, Inc. in Louisville, KY. I specialize in the residential side of the business, however, the company with which I am affiliated does its fair share of commercial sales, leasing, & management. I still enjoy and perform appraisals when it fits into the schedule, and I owe much of what I have learned about real estate to my two year stint focusing on appraising as well as an eight month "career" as a mortgage loan originator.

Working as a mortgage originator, I was able to observe a field I was not at all familiar with: real estate appraisal. It was during this time of long hours & evening cold calling that I decided I liked the real estate field. I left originating, and entered appraisal school shortly thereafter. I was enthralled by the process & the elements of value. Plus, I liked the idea of getting out & being in the field.

I've now had my real estate license since March. I've been fortunate to have sold enough that I can primarily focus on it as a true career as opposed to an extra job. I like how sales & appraisal compliment each other. Appraising gave me a leg up on many agents, and showing houses gives me new perspectives every day on what makes a piece of property more or less valuable than another piece of property.