A market analysis reveals the following for luxury homes over $1 million: 85 active listings, 12 sales in the past 3 months, and 8 pending sales. What is the absorption rate per month?
Correct Answer
A) 4.0 homes per month
Why this is correct: Absorption rate measures the rate at which properties sell in a market. It is calculated as closed sales divided by the time period. Here, 12 sales ÷ 3 months = 4.0 homes per month. Pending sales are not included because they are not yet closed. Why the other choices are wrong: '3.2 homes per month' might incorrectly include pending sales or miscalculate. '8.5 homes per month' incorrectly uses active listings (85 ÷ 10). '6.7 homes per month' might average sales and pendings. Exam tip: Absorption rate = Closed sales / Time period. Use it with inventory to estimate months of supply (inventory ÷ absorption rate).
Why This Is the Correct Answer
Option B is correct because absorption rate is calculated as completed sales divided by time period: 12 sales ÷ 3 months = 4.0 homes per month. The calculation uses only the 12 actual sales that closed during the 3-month period. Pending sales are excluded because they represent transactions that haven't yet completed and may not close. This straightforward division gives us the monthly rate at which the market is absorbing available inventory.
Why the Other Options Are Wrong
Option B: 3.2 homes per month
Option B incorrectly calculates 3.2 homes per month, which appears to result from an error in the basic division or possibly from incorrectly including or excluding certain data points in the calculation.
Option C: 8.5 homes per month
Option C shows 8.5 homes per month, which doesn't correspond to any logical calculation using the given data and appears to be a distractor answer.
Option D: 6.7 homes per month
Option D incorrectly calculates 6.7 homes per month, which likely results from adding pending sales to actual sales (12 + 8 = 20) and then dividing by 3 months, but pending sales should not be included in absorption rate calculations.
SOAP Method
SOAP: Sales Only, Actual Period. Remember that absorption rate uses Sales Only (completed transactions, not pending) divided by the Actual time Period given.
How to use: When you see an absorption rate question, immediately identify the SOAP elements: look for completed Sales Only (ignore pending/active listings) and divide by the Actual time Period specified in the question.
Exam Tip
Always read carefully to distinguish between active listings, pending sales, and completed sales - only use completed sales in the numerator for absorption rate calculations.
Common Mistakes to Avoid
- -Including pending sales in the calculation
- -Using active listings instead of completed sales
- -Forgetting to divide by the correct time period
Concept Deep Dive
Analysis
Absorption rate is a fundamental market analysis metric that measures the rate at which available homes are sold in a specific market during a given time period. It represents actual market velocity by calculating completed sales divided by the time period, providing insight into market demand and supply dynamics. This metric helps appraisers and real estate professionals understand how quickly inventory is moving and assess market conditions. The calculation only includes closed sales, not pending transactions, as pending sales haven't definitively completed and could potentially fall through.
Background Knowledge
Absorption rate measures market velocity by calculating how quickly available inventory sells over a specific time period, using only completed sales transactions. This metric is essential for market analysis, helping determine whether market conditions favor buyers or sellers and informing pricing strategies.
Real-World Application
Appraisers use absorption rates to support market condition adjustments in their reports, helping justify whether a market is experiencing rapid sales (seller's market) or slow movement (buyer's market), which can affect property values and marketing time estimates.
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