A market carries 300 active listings against 25 monthly sales. The months of supply, and the pricing pressure it implies, are:
Correct Answer
A) Twelve months — heavy buyer's market, downward pressure
Why this is correct: Months of supply is calculated as active listings divided by monthly sales: 300 / 25 = 12 months. This indicates a heavy buyer's market (typically over 6-7 months), suggesting downward pressure on prices as sellers compete for few buyers. Why the other choices are wrong: "Twelve months — balanced, with neutral pricing" is wrong because a balanced market usually has 5-7 months of supply. "Two and a half months — clear seller's market pressure" would result from a calculation like 300/120, not the given figures. "Eight months — mild appreciation likely" still indicates oversupply and is not associated with appreciation. Exam tip: Memorize the benchmark: <5-6 months = seller's market; 6-7 months = balanced; >7 months = buyer's market.
Why This Is the Correct Answer
Dividing 300 listings by 25 monthly sales gives exactly 12 months, and 12 months sits far above the balanced range, marking a heavy buyer's market with downward pricing pressure. The answer is the only one that pairs the correct arithmetic with the correct interpretation, which is the structure of the item. The practical consequence for the appraiser is that a negative market conditions adjustment is likely warranted and that exposure time should be estimated generously. Corroborating evidence would include rising days on market and falling sale-to-list ratios.
Why the Other Options Are Wrong
Option B: Twelve months — balanced, with neutral pricing
The arithmetic here is right at twelve months but the interpretation is wrong, since a balanced market runs closer to five to seven months of supply. Twelve months means a full year to absorb current inventory, which no reasonable benchmark treats as neutral. This distractor tests whether the candidate can compute and interpret, not just compute.
Option C: Two and a half months — clear seller's market pressure
Two and a half months would require roughly 120 monthly sales against the 300 listings, which is not the figure given. It also inverts the market signal, since two and a half months genuinely would indicate a seller's market. The option catches candidates who divide in the wrong direction or misread the sales figure.
Option D: Eight months — mild appreciation likely
Eight months matches no computation available from 300 and 25, and its interpretation is also wrong. Eight months of supply already exceeds the balanced range and would indicate softness rather than mild appreciation. Both halves of the option fail independently.
Inventory Divided by Pace
Months of supply asks a simple question: at today's pace, how long until the shelves are empty? Listings on top, monthly sales on the bottom. Then anchor the scale with one number, six, and read anything well above it as buyers in control.
How to use: Compute the ratio first, then classify against the six-month anchor before reading the interpretive half of each option. Eliminate any option whose number is wrong, then eliminate any whose label contradicts your classification.
Exam Tip
These items almost always include one option with the right number and the wrong label. Never stop reading once you spot your computed figure.
Common Mistakes to Avoid
- -Dividing sales by listings instead of listings by sales
- -Selecting an option because the number matches without checking the interpretation
- -Applying national benchmarks to a property type or locality where the balanced range differs
Concept Deep Dive
Analysis
Months of supply, also called the absorption period, expresses inventory in time rather than in units, which makes markets of different sizes directly comparable. The computation is active listings divided by the monthly sales rate, so 300 divided by 25 gives 12 months. Interpretation runs off widely used benchmarks: roughly under five to six months signals a seller's market with upward price pressure, five to seven months is generally treated as balanced, and above about seven months indicates a buyer's market where supply outruns demand and prices come under downward pressure. Twelve months is roughly double the balanced range, meaning it would take a full year to clear existing inventory at the current pace even if no new listings appeared. Sellers in that environment compete through price reductions, concessions, and longer marketing periods, all of which push the sale-to-list ratio down.
Background Knowledge
You need the months of supply formula and the conventional benchmarks separating seller's, balanced, and buyer's markets, keeping in mind that the thresholds vary by property type and locality. You should also know the companion indicators of market direction: days on market, sale-to-list price ratio, absorption rate, and the frequency of seller concessions.
Real-World Application
An appraiser sees inventory in a suburban submarket climb from 90 to 300 listings while closings fall to 25 a month. She supports a downward market conditions adjustment with the twelve-month supply figure, a rising days-on-market series, and a sale-to-list ratio that slipped from 100 to 95 percent.
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