How important is price per square foot when determining the value of a home?
Looking at an average price per square foot for a neighborhood and then multiplying for the home you are looking at is likely NOT a reliable way to figure its true market value.
Estimating the value of a home before you write an offer or list it for sale is more complex than using average $/sq ft. You need to account for the unique characteristics of each individual piece of property and either credit or debit the value of the property as appropriate, based on recent sales of similar homes. Size of the home is important, but you absolutely must account for factors like finishes, layout, location, view and home style. Price per square foot is simply a rough gauge to point you in the right direction. Smaller homes will have a much higher price per square foot than larger homes in the same neighborhood.
Per square-foot costs are used in construction. The square-foot cost to rebuild your home, if it's older, is going to be higher, most likely, than the cost to buy. Those can be based on averages because 2x4s, Sheetrock and other construction materials cost the same per square foot.
The main reason prices per-square-foot is important is to show you trends. If you can compare the average price-per-square-foot for the past 12 months, you can determine whether values are rising or falling.
How does the price per-square-foot help to determine values? In short, it really doesn't. You can't take the average price per-square-foot and multiply it times the square footage of the home you are thinking about buying. Much of the value of a home is subjective and doesn't show up on an amenities list. The pricing per-square-foot simply gives you average or median ranges; it shows you trends. It can't compute value.