A market analysis reveals 120 homes sold in the past 12 months and a current inventory of 180 homes for sale. What is the months of supply?
Correct Answer
A) 18 months
Why this is correct: Months of supply indicates how long it would take to sell the current inventory at the current absorption pace. First, calculate the monthly absorption rate: 120 sales / 12 months = 10 sales per month. Then, divide the current inventory (180 homes) by this rate: 180 / 10 = 18 months of supply. Why the other choices are wrong: "10 months" might result from incorrectly dividing annual sales (120) by inventory (180) without first calculating the monthly rate. "15 months" and "22 months" are miscalculations. Exam tip: The formula is always: Months of Supply = Current Inventory / (Recent Sales / Corresponding Time Period in Months).
Why This Is the Correct Answer
Option C is correct because it follows the proper formula: Months of Supply = Current Inventory ÷ Monthly Absorption Rate. First, we calculate the monthly absorption rate: 120 sales ÷ 12 months = 10 sales per month. Then we divide current inventory by this rate: 180 homes ÷ 10 sales per month = 18 months. This means at the current pace of sales, it would take 18 months to sell all available inventory.
Why the Other Options Are Wrong
Option B: 10 months
Option B (10 months) incorrectly uses the monthly absorption rate as the final answer, failing to complete the calculation by dividing current inventory by this rate.
Option C: 15 months
Option C (15 months) appears to be a calculation error, possibly from incorrectly dividing 180 by 12 instead of using the proper monthly absorption rate of 10.
Option D: 22 months
Option D (22 months) is incorrect and may result from adding the monthly absorption rate to the months in a year, or some other mathematical error in the calculation process.
The IMA Formula
Remember 'IMA' - Inventory ÷ Monthly Absorption = months of supply. Think 'I'M 'A'bsorbing inventory monthly!'
How to use: When you see a months of supply question, immediately identify the 'I' (current inventory) and calculate 'MA' (monthly absorption by dividing annual sales by 12), then divide I by MA.
Exam Tip
Always calculate monthly absorption first by dividing annual sales by 12, then divide current inventory by that monthly rate - don't skip the intermediate step.
Common Mistakes to Avoid
- -Using annual sales instead of monthly absorption rate
- -Dividing monthly absorption by inventory instead of inventory by absorption
- -Forgetting to convert annual data to monthly data before calculating
Concept Deep Dive
Analysis
Months of supply is a critical market indicator that measures how long it would take to sell all current inventory at the current absorption rate. This metric helps appraisers and real estate professionals understand market conditions - whether it's a buyer's market (high months of supply) or seller's market (low months of supply). The calculation requires two key components: current inventory available for sale and the monthly absorption rate (average sales per month). Understanding this concept is essential for market analysis sections of appraisal reports and helps determine market trends and pricing pressures.
Background Knowledge
Months of supply is calculated by dividing current inventory by the monthly absorption rate (average monthly sales). A balanced market typically shows 4-6 months of supply, while higher numbers indicate a buyer's market and lower numbers suggest a seller's market.
Real-World Application
Appraisers use months of supply in the market conditions section of appraisal reports to support their analysis of whether the market favors buyers or sellers, which can impact pricing trends and marketing time estimates for the subject property.
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