A market has 450 homes for sale and typically sells 75 homes per month. What is the months of inventory?
Correct Answer
A) 6.0 months
Why this is correct: Months of inventory = Current Active Listings ÷ Monthly Absorption Rate. Calculation: 450 homes ÷ 75 homes/month = 6.0 months. This means at the current sales pace, it would take 6 months to sell all existing inventory. Why the other choices are wrong: '4.5 months' would result from 450 ÷ 100, using an incorrect absorption rate. '7.5 months' would be 450 ÷ 60. '9.0 months' would be 450 ÷ 50. Exam tip: Months of inventory = Supply ÷ Demand. Over 6 months typically indicates a buyer's market.
Why This Is the Correct Answer
Option B is correct because months of inventory equals current inventory divided by monthly absorption rate. The calculation is 450 homes for sale ÷ 75 homes sold per month = 6.0 months. This means at the current sales pace, it would take exactly 6 months to sell all available inventory. This is a fundamental market analysis calculation that appraisers use regularly to assess market conditions.
Why the Other Options Are Wrong
Option B: 4.5 months
Option B (4.5 months) results from an incorrect calculation, possibly confusing the formula or making an arithmetic error in the division.
Option C: 7.5 months
Option C (7.5 months) suggests an error in the division calculation, possibly reversing numbers or making computational mistakes.
Option D: 9.0 months
Option D (9.0 months) indicates a significant calculation error, possibly multiplying instead of dividing or using wrong figures.
DIAS Formula
DIAS: Divide Inventory by Absorption Speed. Remember 'DIAS' (Spanish for 'days') to recall you're calculating time periods. Always divide the bigger number (inventory) by the smaller number (monthly sales) to get months.
How to use: When you see months of inventory questions, immediately think DIAS - identify the total inventory number and monthly sales rate, then divide inventory by absorption speed to get your answer.
Exam Tip
Double-check your division by ensuring the result makes logical sense - months of inventory should typically range from 3-12 months in most markets, with 6 months often considered balanced.
Common Mistakes to Avoid
- -Dividing monthly sales by inventory instead of inventory by sales
- -Confusing absorption rate with months of inventory
- -Using incorrect time periods (weekly vs monthly data)
Concept Deep Dive
Analysis
Months of inventory is a critical market analysis metric that measures the balance between supply and demand in a real estate market. It represents the theoretical time period required to exhaust the current housing inventory at the prevailing sales pace, assuming no new listings are added. This metric helps appraisers assess market conditions - whether it's a buyer's market (high inventory), seller's market (low inventory), or balanced market. The calculation is straightforward: divide total active listings by the average monthly sales volume to determine market absorption timeframe.
Background Knowledge
Market analysis requires understanding supply and demand dynamics through quantitative metrics like months of inventory, absorption rates, and market velocity. Appraisers must be able to calculate and interpret these metrics to assess market conditions and support their valuation conclusions.
Real-World Application
Appraisers use months of inventory to support market condition conclusions in their reports, helping explain whether comparable sales occurred in similar market conditions and whether adjustments for market trends are necessary.
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