A market has 180 active listings and has been closing 30 sales per month. What is its months of supply, and what does it suggest?
Correct Answer
A) Six months — roughly balanced conditions
Why this is correct: Months of supply = Active listings ÷ Monthly sales rate = 180 ÷ 30 = 6 months. This indicates a roughly balanced market, as 5-7 months of supply is often considered equilibrium. Why the other choices are wrong: Six months is not severe seller's market (typically <4-5 months). One-fifth of a month would indicate extreme scarcity, not this calculation. Thirty months would indicate a deep buyer's market, not this calculation. Exam tip: Balanced market is typically around 6 months of supply.
Why This Is the Correct Answer
180 divided by 30 equals six months, which sits at the conventional center of the balanced range. Roughly balanced conditions is therefore the correct label for the computed figure. The pairing matters because the item, like others of its type, offers the right number attached to the wrong interpretation as a distractor. Corroboration would come from stable days on market and a sale-to-list ratio holding steady.
Why the Other Options Are Wrong
Option B: Six months — a severe seller's market
The arithmetic is correct but the label is not. A severe seller's market shows up at two to three months or less, where inventory is scarce, listings sell in days, and buyers waive contingencies. Six months describes a market where a buyer can shop and negotiate, which is the opposite of severe scarcity.
Option C: One-fifth of a month — extreme scarcity
One-fifth of a month comes from dividing 30 by 180, inverting the formula. The result is nonsensical as a supply measure, since it would mean the entire inventory clears in about six days. Checking that the answer is expressed in a plausible number of months catches this immediately.
Option D: Thirty months — a deep buyer's market
Thirty months corresponds to no operation on the given figures and appears to lift the monthly sales count and relabel it as the answer. Thirty months of supply would describe a nearly frozen market, such as a resort segment after a crash. Neither the computation nor the interpretation follows from the data.
Six Is the Fulcrum
Picture a seesaw with six months at the pivot. Slide toward two or three months and sellers sit on the high side with the leverage. Slide toward ten or twelve and buyers do. The number alone tells you who is negotiating from strength.
How to use: Divide listings by monthly sales, then place the result relative to six before reading any interpretive language. Discard options whose number is wrong first, then discard those whose label contradicts your placement.
Exam Tip
Sanity-check by asking whether the answer is a plausible number of months. Anything under one month or over about two years signals an inverted or garbled calculation.
Common Mistakes to Avoid
- -Inverting the formula and dividing sales by listings
- -Matching the computed number without checking the interpretive label
- -Applying a generic six-month benchmark to a property type whose balanced range is different
Concept Deep Dive
Analysis
Months of supply converts a raw inventory count into a measure of time, which is what makes it interpretable across markets of different sizes. Dividing 180 active listings by 30 monthly closings gives six months, meaning current inventory would take half a year to clear at the present pace if no new listings appeared. Six months has long served as the rough dividing line between seller-favorable and buyer-favorable conditions, with the balanced band usually described as about five to seven months. A figure near that line signals neither the bidding-war conditions of a tight market nor the price-cutting of an oversupplied one, and the appraiser would expect ordinary marketing times, sale-to-list ratios near the high nineties, and modest or no market conditions adjustment. Because thresholds vary by property type and locality, the sensible practice is to compare the current figure to the same market's own history rather than to a national rule.
Background Knowledge
You need the months of supply formula and the conventional benchmark bands, with the caution that thresholds differ across property types and localities. You should also know the related indicators that confirm a market's balance: days on market, sale-to-list price ratio, the pending-to-active ratio, and the prevalence of seller concessions.
Real-World Application
An appraiser tracking a stable suburban submarket finds inventory and closings both steady, producing six months of supply for three consecutive quarters. She concludes no market conditions adjustment is warranted, supports a 45 to 60 day exposure time from median days on market, and states the supporting figures in the report.
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