A neighborhood has 150 homes currently for sale and 25 homes sell per month on average. What is the absorption rate in months?
Correct Answer
B) 6.0 months
Absorption rate is calculated by dividing the current inventory by the average monthly sales rate: 150 homes ÷ 25 homes per month = 6.0 months. This represents how long it would take to sell all current inventory at the current pace.
Why This Is the Correct Answer
Option B is correct because the absorption rate formula is: Current Inventory ÷ Average Monthly Sales = Absorption Rate. Plugging in the values: 150 homes ÷ 25 homes per month = 6.0 months. This means at the current sales pace of 25 homes per month, it would take exactly 6 months to sell all 150 homes currently on the market. The calculation is direct division with no additional factors or adjustments needed.
Why the Other Options Are Wrong
Option A: 5.0 months
Option A (5.0 months) results from incorrectly calculating 125 ÷ 25 instead of 150 ÷ 25, possibly misreading the inventory number or making an arithmetic error.
Option C: 7.5 months
Option C (7.5 months) could result from using incorrect numbers in the calculation, such as dividing 150 by 20 instead of 25, or adding an unnecessary adjustment factor.
Option D: 12.5 months
Option D (12.5 months) appears to result from dividing 150 by 12 instead of 25, possibly confusing monthly sales with annual calculations or misunderstanding the given data.
I-OVER-S Method
Remember 'Inventory OVER Sales' - always put the total Inventory on top and monthly Sales on the bottom when dividing. Think of it as 'How many months of Sales does it take to eat through the Inventory?'
How to use: When you see absorption rate questions, immediately identify the two numbers: total inventory (houses for sale) and monthly sales rate, then divide inventory by sales using the I-OVER-S method.
Exam Tip
Always double-check that you're using monthly sales figures, not annual - if given annual sales, divide by 12 first to get monthly sales before calculating absorption rate.
Common Mistakes to Avoid
- -Dividing sales by inventory instead of inventory by sales
- -Using annual sales figures instead of monthly
- -Confusing absorption rate with other market metrics like DOM (Days on Market)
Concept Deep Dive
Analysis
Absorption rate is a fundamental market analysis metric that measures how long it would take to sell all current inventory at the current sales pace. This concept is crucial for understanding market conditions, as it indicates whether a market favors buyers (high absorption rate) or sellers (low absorption rate). The calculation is straightforward: divide total inventory by average monthly sales to determine the number of months needed to absorb all current listings. This metric helps appraisers assess market velocity and make informed adjustments to comparable sales.
Background Knowledge
Absorption rate is expressed in months and represents market velocity - how quickly properties are selling relative to available inventory. A lower absorption rate (fewer months) indicates a faster-moving, seller's market, while a higher absorption rate suggests a slower, buyer's market.
Real-World Application
Appraisers use absorption rates to determine if comparable sales occurred in similar market conditions and to make time adjustments to sales prices when market velocity has changed significantly between the sale date and appraisal date.
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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