A house resold with no changes: $300,000 in March, $318,000 fourteen months later. What annual appreciation does this resale indicate?
Correct Answer
C) About 5.1% per year, annualized
Why this is correct: The price increased from $300,000 to $318,000, a gain of $18,000 or 6% over 14 months. To annualize: 6% × (12 months / 14 months) = approximately 5.14% per year. Why the other choices are wrong: 'About 6% per year' ignores the 14-month period, overstating the annual rate. 'Exactly 18% per year' is a miscalculation of the total gain. 'About 3% per year' is roughly half the correct rate and lacks basis. Exam tip: For time adjustments, always annualize the percentage change based on the exact holding period.
Why This Is the Correct Answer
Option C is right because six percent earned over fourteen months annualizes to roughly five point one percent. Multiply the total percentage change by twelve divided by the number of months in the holding period, or compound it over the fraction of a year - both produce about five point one here. Annualizing matters because comparables in a grid will have sold at different dates, and a rate expressed per year lets the appraiser apply the right amount to each sale according to how long ago it closed. Reporting the rate along with the evidence behind it is what makes the adjustment defensible.
Why the Other Options Are Wrong
Option A: About 6% per year over the holding period
Six percent is the total change across the entire fourteen months, not an annual rate, so treating it as annual overstates appreciation by about seventeen percent of itself. The error is easy to make because six percent is a plausible-sounding annual figure. Whenever a holding period is given in months and it is not twelve, the percentage change and the annual rate are different numbers.
Option B: Exactly 18% per year of ownership
Eighteen is the dollar gain in thousands, not a percentage, so this option converts eighteen thousand dollars into eighteen percent. The word exactly is a further tell, since an annualized rate derived from a single resale is an estimate rather than an exact quantity. Always divide the gain by the beginning price before calling anything a percentage.
Option D: About 3% per year, after seasonality
Three percent is roughly half the correct figure and corresponds to no operation the data support; nothing in the stem introduces seasonality, and a seasonality correction would require a documented seasonal pattern in this market rather than a general adjustment. Invoking an unsupported factor to move a number is the opposite of deriving an adjustment. If seasonality genuinely mattered, the analysis would need matched pairs from comparable points in the annual cycle.
Total change, then twelve over months
Two steps, always in this order. Total change first - gain divided by starting price. Then twelve over the months held, multiplied in. Six percent over fourteen months becomes six times twelve over fourteen, about five point one.
How to use: Circle the holding period in the stem before you compute anything. If it is not twelve months, you know the total change and the annual rate will both appear among the answers, and only one of them answers the question asked.
Exam Tip
Read whether the question wants the total change over the period or the annualized rate; examiners put both in the choices and the wording is the only thing separating them.
Common Mistakes to Avoid
- -Reporting the total percentage change as an annual rate
- -Confusing the dollar gain with a percentage
- -Building an adjustment from a single resale
- -Introducing an unsupported seasonality or momentum factor
Concept Deep Dive
Analysis
This question tests the derivation of a market conditions adjustment from a resale, which is the cleanest evidence available because the property is held constant. A resale of the identical property with no changes isolates the passage of time as the only variable, which is precisely what a market conditions adjustment is meant to capture. The arithmetic has two steps and candidates routinely stop after the first. Step one is the total change: eighteen thousand on three hundred thousand is six percent. Step two is annualization, converting a fourteen-month change into a twelve-month rate, which means multiplying by twelve over fourteen and yielding about five point one percent. Compounding instead of prorating gives essentially the same figure over this short a span. The caution worth carrying is that one resale is one observation - a credible market conditions adjustment is built from multiple resales, from paired sales, or from a time-series analysis of the relevant market segment.
Background Knowledge
You need the market conditions element of comparison and the techniques for deriving it - resales of the same property, paired sales differing chiefly in date, repeat-sale indices, and time-series analysis of the relevant market segment. You should also know how to annualize a change over a period other than twelve months, the difference between simple prorating and compounding, and the requirement that any adjustment be supported by evidence from the subject's market rather than a general index.
Real-World Application
An appraiser building a market conditions adjustment collects eleven resales of unchanged properties in the subject's submarket over two years, annualizes each, and finds a tight cluster around five percent. That distribution, rather than any single pair, is what she cites in the report to support the monthly adjustment applied to each comparable.
More Market Questions
Building permit data is most useful to an appraiser as:
In the neighborhood life cycle, what characterizes the decline stage?
In which phase of the real estate cycle do rising vacancies first meet a still-growing construction pipeline?
The principle of consistent use prohibits:
Employment in a one-industry town falls 20%. Through what mechanism does housing demand contract?
Frictional vacancy in a rental market refers to:
The principle of opportunity cost applied to real estate means:
A neighborhood with a wide range of property values requires the appraiser to:
In-migration to a metro area increases housing demand primarily by:
Absorption rate expressed in units per month is calculated by:
People Also Study
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam
Income Approach
8.2% of exam