A neighborhood has 180 homes for sale and 15 homes sell per month. What is the absorption rate in months?
Correct Answer
B) 12.0 months
Absorption rate is calculated by dividing total inventory by sales per period: 180 homes ÷ 15 homes per month = 12.0 months. This represents how long it would take to sell all current inventory at the current sales pace.
Why This Is the Correct Answer
Option B is correct because absorption rate equals total inventory divided by sales per time period. The calculation is 180 homes ÷ 15 homes per month = 12.0 months. This means at the current sales pace of 15 homes per month, it would take exactly 12 months to absorb all 180 homes currently for sale. The formula is: Absorption Rate = Total Inventory ÷ Sales Per Period.
Why the Other Options Are Wrong
Option A: 8.3 months
Option A (8.3 months) appears to result from incorrectly calculating 15 ÷ 180 × 100, which reverses the proper formula and applies an unnecessary percentage conversion.
Option C: 15.0 months
Option C (15.0 months) incorrectly uses just the monthly sales figure (15) without performing any division, showing a fundamental misunderstanding of the absorption rate formula.
Option D: 10.8 months
Option D (10.8 months) likely results from an arithmetic error or using an incorrect formula, possibly confusing absorption rate with another market metric calculation.
ITAS Method
ITAS = Inventory Total ÷ Average Sales. Remember: 'I Take All Stock' divided by 'Average Sales' to find how long inventory will last.
How to use: When you see absorption rate questions, immediately identify the total inventory (I) and average sales per period (AS), then divide I ÷ AS to get time periods needed to absorb inventory.
Exam Tip
Always double-check that you're dividing inventory by sales rate, not the reverse - the result should be in time units (months/days) that make logical sense for market conditions.
Common Mistakes to Avoid
- -Reversing the formula (sales ÷ inventory)
- -Forgetting to match time periods (monthly sales with monthly absorption)
- -Confusing absorption rate with other market metrics like months of supply
Concept Deep Dive
Analysis
Absorption rate is a critical market analysis metric that measures how long it would take to sell all available inventory at the current sales pace. This concept tests understanding of basic market dynamics and the relationship between supply (inventory) and demand (sales velocity). The calculation is straightforward division, but the concept's application in determining market conditions (buyer's vs. seller's market) is crucial for appraisers. Understanding absorption rates helps appraisers assess market liquidity and make informed adjustments to comparable sales.
Background Knowledge
Absorption rate measures market liquidity by calculating how long current inventory would last at the present sales pace. Generally, 6+ months indicates a buyer's market (oversupply), while under 6 months suggests a seller's market (undersupply).
Real-World Application
Appraisers use absorption rates to support market condition adjustments in the sales comparison approach, justify marketing time estimates, and provide market analysis for clients making investment or listing decisions.
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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