A neighborhood has 150 homes for sale and the absorption rate is 25 homes per month. What is the current supply in months?
Correct Answer
C) 6.0 months
Supply in months is calculated by dividing total inventory by absorption rate: 150 homes ÷ 25 homes per month = 6.0 months of supply.
Why This Is the Correct Answer
Option C is correct because the months of supply calculation is simply total inventory divided by absorption rate. With 150 homes available and 25 homes selling per month, the calculation is 150 ÷ 25 = 6.0 months. This means at the current sales pace, it would take exactly 6 months to sell all available inventory. The math is straightforward and yields a clean whole number result.
Why the Other Options Are Wrong
Option A: 4.2 months
Option A (4.2 months) is incorrect because it appears to result from calculation errors, possibly dividing incorrectly or using wrong numbers in the formula.
Option B: 5.5 months
Option B (5.5 months) is incorrect and likely results from mathematical errors in the division or potentially confusing the numerator and denominator in the calculation.
Option D: 7.3 months
Option D (7.3 months) is incorrect and suggests calculation errors, possibly from inverting the formula or making arithmetic mistakes in the division process.
The SODA Formula
SODA: Supply ÷ Output = Duration Available. Think of inventory as soda in a vending machine - if you have 150 sodas and sell 25 per month, how long until empty?
How to use: When you see months of supply questions, immediately think SODA and set up the division: total inventory (Supply) divided by monthly sales rate (Output) equals Duration Available in months.
Exam Tip
Always double-check that you're dividing inventory by absorption rate, not the reverse - this is the most common error on these questions.
Common Mistakes to Avoid
- -Dividing absorption rate by inventory instead of inventory by absorption rate
- -Forgetting to convert the final answer to months
- -Confusing absorption rate with other market metrics like days on market
Concept Deep Dive
Analysis
This question tests the fundamental market analysis concept of months of supply, which measures how long it would take to sell all current inventory at the current absorption rate. This metric is crucial for understanding market conditions and is a key indicator used by appraisers to assess market trends. The calculation is straightforward division, but understanding its implications for market analysis is essential. A higher months of supply indicates a buyer's market, while lower supply suggests a seller's market.
Background Knowledge
Months of supply is a critical market indicator that measures market balance between supply and demand. Generally, 6 months of supply is considered a balanced market, with less indicating a seller's market and more indicating a buyer's market.
Real-World Application
Appraisers use months of supply to support their market conditions analysis in appraisal reports, helping explain whether the market favors buyers or sellers, which can impact pricing trends and marketing time estimates.
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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