A neighborhood has 150 homes for sale and an average of 25 homes sell per month. What is the absorption rate in months?
Correct Answer
D) 6.0 months
Why this is correct: Absorption rate (in months) measures how long current inventory would last at the current sales pace. Calculation: Inventory (150 homes) ÷ Sales per month (25) = 6.0 months. Why the other choices are wrong: '4.2 months' might result from dividing sales by inventory. '5.0 months' could be a miscalculation. '3.8 months' is not supported by the given numbers. Exam tip: Absorption rate formula: Total active listings ÷ Average monthly sales = Months of supply.
Why This Is the Correct Answer
Option B is correct because the absorption rate formula is: Total Inventory ÷ Average Sales per Period = Absorption Rate. Using the given data: 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 absorb (sell) all 150 homes currently on the market. The calculation is direct division with no additional adjustments needed.
Why the Other Options Are Wrong
Option A: 4.2 months
Option A (4.2 months) appears to result from incorrectly using 105 homes instead of 150, or possibly confusing the numerator and denominator in some variation of the calculation.
Option B: 5.0 months
Option B (5.0 months) results from an incorrect calculation, possibly dividing 125 by 25 instead of 150 by 25, or making an arithmetic error in the division process.
Option C: 3.8 months
Option C (3.8 months) likely results from using incorrect figures in the calculation, possibly 95 homes instead of 150, or making a significant arithmetic error in the division.
ITAS Method
ITAS = Inventory ÷ Time = Absorption Speed. Remember 'I Take All Stock' - you take all the inventory and divide by the time period to get absorption speed.
How to use: When you see absorption rate questions, immediately identify the ITAS components: Inventory (total homes for sale), Time period sales rate, then divide Inventory by Time rate for Absorption Speed.
Exam Tip
Always double-check that you're dividing inventory BY sales rate, not sales rate by inventory - the most common error is reversing the formula.
Common Mistakes to Avoid
- -Reversing the formula (dividing sales by inventory)
- -Using wrong time periods or mixing monthly/annual figures
- -Confusing absorption rate with turnover rate or other market metrics
Concept Deep Dive
Analysis
Absorption rate is a fundamental market analysis metric that measures how long it would take to sell all available inventory at the current sales pace. This concept is crucial for appraisers to understand market conditions and supply-demand dynamics in a given area. The calculation is straightforward: total inventory divided by average sales per time period equals the absorption rate in that time period. A higher absorption rate indicates a slower market with more supply relative to demand, while a lower absorption rate suggests a faster-moving market with strong demand relative to supply.
Background Knowledge
Absorption rate is a key market indicator used in real estate analysis to measure market velocity and balance between supply and demand. Appraisers use this metric to assess market conditions, with rates above 6 months typically indicating a buyer's market and rates below 6 months suggesting a seller's market.
Real-World Application
Appraisers use absorption rates to support market condition conclusions in appraisal reports, helping explain whether a market favors buyers or sellers, which can impact marketing time assumptions and comparable sale selection.
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