A market analysis shows 200 homes sold in the past 12 months and an average inventory of 150 homes. What is the absorption rate per month?
Correct Answer
B) 16.7 homes
Absorption rate is calculated as total sales divided by the time period: 200 homes ÷ 12 months = 16.7 homes per month. This represents the average monthly sales velocity in the market.
Why This Is the Correct Answer
Option B is correct because absorption rate is calculated by dividing total sales by the time period: 200 homes sold ÷ 12 months = 16.67 homes per month, which rounds to 16.7. This represents the average monthly sales velocity in the market. The inventory figure of 150 homes is not used in the absorption rate calculation itself, but would be used in conjunction with the absorption rate to calculate months of supply.
Why the Other Options Are Wrong
Option A: 12.5 homes
Option A incorrectly calculates 12.5 homes per month, which appears to be derived from dividing 150 inventory by 12 months rather than using the actual sales data of 200 homes.
Option C: 25.0 homes
Option C shows 25.0 homes per month, which doesn't correspond to any logical calculation using the given data and significantly overestimates the absorption rate.
Option D: 33.3 homes
Option D shows 33.3 homes per month, which is far too high and doesn't match any reasonable calculation from the provided market data.
Sales Time Division (STD)
Remember STD: Sales ÷ Time = Demand rate. Think 'Sales Through Time' - you're measuring how sales flow through a time period.
How to use: When you see absorption rate questions, immediately identify the total sales figure and divide by the time period. Ignore inventory numbers for the basic absorption rate calculation.
Exam Tip
Don't confuse absorption rate with months of supply - absorption rate uses sales divided by time, while months of supply uses inventory divided by absorption rate.
Common Mistakes to Avoid
- -Using inventory instead of sales in the calculation
- -Confusing absorption rate with months of supply
- -Forgetting to divide by the time period
Concept Deep Dive
Analysis
Absorption rate is a fundamental market analysis metric that measures the pace at which available homes are sold in a specific market during a given time period. It represents market velocity and helps appraisers understand supply and demand dynamics. The calculation is straightforward: total sales divided by the time period, which gives the average number of homes sold per unit of time. This metric is crucial for determining market conditions, whether it's a buyer's market, seller's market, or balanced market.
Background Knowledge
Absorption rate measures market velocity by calculating how many homes sell per time period, typically expressed monthly. It's different from months of supply, which divides current inventory by absorption rate to show how long it would take to sell all available homes at the current pace.
Real-World Application
Appraisers use absorption rates to support market condition conclusions in reports, helping determine if comparable sales occurred in similar market conditions and supporting adjustments for market trends.
More Market Analysis Questions
Which comparable selection criterion is MOST important when choosing sales for a residential appraisal?
A residential subdivision has absorbed 120 units over the past 18 months. Based on this historical data, how long would it take to sell 80 remaining lots?
Which of the following is the correct sequence for analyzing highest and best use?
A market has 500 homes sold in the past 12 months and currently has 180 homes for sale. The monthly absorption rate is:
When analyzing highest and best use, which of the following would make a use financially infeasible?
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