Larger Homes, or Just Higher Prices?

September 23, 2015

Calculator and house plan blueprints close up , shallow DOF photo

What You're Paying For…

There is no doubt that home prices are on a rocket ride upward in San Carlos, and in other communities along the Peninsula. Believe it or not, the price for a single-family residence in San Carlos will now set you back an average of $1,600,000 — the highest average ever, according to the MLS. Only 5 years ago, that very same “average” home sold for just under $1M, or about 38% less…which, admittedly, seemed like a lot back then too.

When you try to wrap your head around a meteoric growth rate like this, you have to wonder about the characteristics of the houses that are being sold in San Carlos. Are homes suddenly that much larger than they were 5 years ago? Or are people simply spending over 60% more for the same size houses? I think you already know the answer to these questions before you even look below, but according to the data it's some of both — but much more the latter.

Price Per Square Foot, and Average Home Size.

One of the metrics that I often use when analyzing home prices is the price per square foot ratio.  This is simply the final sales price of a home divided by its square footage. This is somewhat useful because it creates a normalized measurement that you can use to compare prices of different sized homes. Take a look a the chart below, which shows the average price per square foot of all home sold in San Carlos since 2008:

 

SC PPSF - SFRSource:  Multiple Listing Service (MLS).

 

What this chart obviously tells you is that the average price per square foot of a single-family residence sold in San Carlos has climbed nearly 60% in the 6 years since the Great Recession. Back in 2009, we only talked about the $600/square foot milestone when discussing brand new construction, or a nice recently remodeled home. Today, those same homes are fetching closer to $1,000/square foot.

But what that chart does not tell you is the trend of the size of homes being sold in San Carlos. With the remodeling boom in full swing, one may assume that homes being sold today are quite a bit larger than 6 years ago…but is that really the case?

Here is a chart of those very same homes above that sold in San Carlos since 2008, but this time the data is sorted by average square footage.  It tells a slightly different tale:

 

SC Home SizeSource: Multiple Listing Service (MLS).

The average size of a home that has sold in San Carlos since 2009 has only grown by 200 square feet, or about the size of a modest one-car garage! Although the relative direction of the arrows may be a bit deceiving at first glance, what these two charts clearly show is that while the price of a San Carlos home has jumped nearly 60% since 2009, the size of those very homes has only grown 11% on average.

If you take nothing else away from this post, that's it in a nutshell.

Spending More for the Same.

This data makes sense, since price per square foot is not a linear relationship across all home sizes.  Smaller homes tend to have higher $/sq foot numbers because the value of the lot sometimes is greater than the value of the house, and the fact that there's simply a floor to home values of any size in San Carlos.  So it's quite common to see numbers close to $1,000/sq foot for smaller homes – almost regardless of condition.

Conversely, large homes tend to have lower $/sq foot results because these homes have lots of lower value square footage (huge family rooms, living rooms). And we're simply not at the point where every 3,000 square foot home is going to fetch $3,000,000.  At least not yet…

What this data does tell us is home buyers are paying a much higher price for only a slightly larger house than they would have only a half decade ago. And that may not be comforting news to many…

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