A luxury-home segment had 25 closed sales over the past year and 15 active homes. If one additional luxury home is listed today and the historical sales pace continues, what is the resulting months of supply for all 16 listings? Round to one decimal place.
Correct Answer
C) 7.7 months
Inventory = 15 + 1 = 16; monthly sales = 25/12; months = 16/(25/12) = 7.68, rounded to 7.7. Use the same population, period and price/listing definition throughout. Common errors: using the 15 existing listings instead of 16 gives 7.2 months; dividing by annual sales and reporting years as months gives 0.6 months; using the sales count instead of the listings gives 12.0 months.
Why This Is the Correct Answer
Option C is correct because inventory is 15 + 1 = 16 listings, the monthly sales pace is 25 / 12 = about 2.08 sales per month, and 16 / (25 / 12) = 7.68, which rounds to 7.7 months. This follows the months-of-supply formula of total listings divided by the absorption rate.
Why the Other Options Are Wrong
Option A: 0.6 months
Option A is wrong because 0.6 months comes from dividing listings by annual sales, 16 / 25 = 0.64, which is a figure in years, and then labeling it months. The correct calculation converts sales to a monthly rate: 16 / (25 / 12) = 7.7 months.
Option B: 7.2 months
Option B is wrong because 7.2 months uses the 15 existing listings instead of 16: 15 / (25 / 12) = 7.2. The question asks for supply after one more listing, so the correct figure is 16 / (25 / 12) = 7.7 months.
Option D: 12.0 months
Option D is wrong because 12.0 months uses the sales count instead of the listings: 25 / (25 / 12) = 12.0. Months of supply divides listings, not sales, by the monthly rate, giving 16 / (25 / 12) = 7.7 months.
Listings over monthly sales
Months of supply equals listings divided by sales per month, so turn annual sales into a monthly pace first.
How to use: Use this whenever a question gives annual sales and asks for supply in months.
Exam Tip
Check the units: if sales are given per year, divide by 12 to get a monthly rate before dividing it into the listing count.
Common Mistakes to Avoid
- -Forgetting to add the new listing to the inventory count
- -Dividing by annual sales and reporting the result as months
- -Putting sales rather than listings in the numerator
Concept Deep Dive
Analysis
This question tests the months-of-supply calculation: total listings divided by the monthly absorption rate. It adds a twist by changing inventory to 16 listings, so you must update the numerator and convert annual sales to a monthly pace before dividing.
Background Knowledge
Absorption rate is the rate at which available properties are sold or leased in a market during a given period. Months of housing supply equals total listings divided by the monthly absorption rate, and it indicates how long current inventory would last at the recent sales pace. Higher months of supply generally points to a softer market for sellers.
Real-World Application
An appraiser valuing a luxury home sees that only 25 comparable homes sold in the past year while 16 are now listed. About 7.7 months of supply suggests longer marketing times in this segment, which the appraiser considers in the market conditions analysis and exposure time.
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