A market has 500 homes sold in the past 12 months and currently has 180 homes for sale. The monthly absorption rate is:
Correct Answer
C) 42 homes per month
Monthly absorption rate is calculated as annual sales divided by 12 months: 500 homes ÷ 12 months = 41.67, rounded to 42 homes per month.
Why This Is the Correct Answer
Option C is correct because the monthly absorption rate is calculated by dividing the total annual sales by 12 months. With 500 homes sold in the past 12 months, the calculation is 500 ÷ 12 = 41.67 homes per month. When rounded to the nearest whole number, this equals 42 homes per month. The current inventory of 180 homes is not used in calculating the absorption rate itself, but would be used to calculate months of supply.
Why the Other Options Are Wrong
Option A: 28 homes per month
Option A (28 homes per month) is incorrect because it significantly underestimates the actual absorption rate, representing only about 336 annual sales instead of the actual 500 sales recorded.
Option B: 36 homes per month
Option B (36 homes per month) is incorrect as it would represent only 432 annual sales, which is 68 homes fewer than the actual 500 homes sold in the market.
Option D: 48 homes per month
Option D (48 homes per month) is incorrect because it overestimates the absorption rate, representing 576 annual sales, which is 76 homes more than actually sold.
The SALES Division Rule
Remember 'SALES ÷ 12' - Simply divide annual SALES by 12 months to get monthly absorption. Think of it as 'How many Sales Are Lost Each Second' becomes 'How many Sales Are Leaving Each Month' when you divide by 12.
How to use: When you see absorption rate questions, immediately look for total sales in a time period, then divide by the number of time units. Ignore inventory numbers unless asked for months of supply.
Exam Tip
Always check if the question asks for absorption rate or months of supply - they use the same data but are calculated differently and often both appear as answer choices to confuse test-takers.
Common Mistakes to Avoid
- -Confusing absorption rate with months of supply calculation
- -Using current inventory in the absorption rate formula
- -Forgetting to convert annual data to monthly by dividing by 12
Concept Deep Dive
Analysis
The absorption rate is a fundamental market analysis metric that measures the pace at which available homes are being sold in a specific market over a given time period. It represents the rate of inventory depletion and is crucial for understanding market velocity and supply-demand dynamics. The monthly absorption rate specifically tells us how many homes are typically sold each month, which helps appraisers assess market conditions and predict how long current inventory might last. This metric is essential for market analysis sections of appraisal reports and helps determine whether a market is balanced, favoring buyers, or favoring sellers.
Background Knowledge
Absorption rate is calculated by dividing total sales over a specific period by the number of time units in that period. It's often confused with months of supply, which is calculated by dividing current inventory by the absorption rate.
Real-World Application
Appraisers use absorption rates to support their market conditions analysis in reports, helping lenders understand if a property will sell quickly in foreclosure scenarios and assisting in determining appropriate marketing time estimates for the subject property.
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