A neighborhood has 200 homes for sale and 25 homes sell per month. What is the absorption rate in months?
Correct Answer
B) 8.0 months
Absorption rate is calculated by dividing the total inventory by the rate of sales: 200 homes ÷ 25 homes per month = 8.0 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: Total Inventory ÷ Sales Rate = Absorption Rate. With 200 homes for sale and 25 homes selling per month, the calculation is 200 ÷ 25 = 8.0 months. This means at the current sales pace, it would take exactly 8 months to absorb all the existing inventory. The calculation is direct division with no additional factors or adjustments needed.
Why the Other Options Are Wrong
Option A: 6.0 months
Option A (6.0 months) results from an incorrect calculation, possibly from dividing 150 by 25 instead of 200 by 25, or from some other mathematical error in the basic division.
Option C: 10.0 months
Option C (10.0 months) would result from dividing 250 by 25 instead of 200 by 25, indicating an error in identifying the correct inventory number or a calculation mistake.
Option D: 12.5 months
Option D (12.5 months) appears to result from incorrectly calculating 250 ÷ 20 or some other combination of wrong numbers, showing confusion about both the inventory count and sales rate.
ABSORB Formula
ABSORB = Available inventory ÷ Sales rate per month = Months to absorb. Think of a sponge ABSORBing water - how long does it take to soak up all the available liquid at the current rate?
How to use: When you see absorption rate questions, immediately identify the 'A' (Available inventory) and the 'S' (Sales rate), then divide A by S to get the absorption time in months.
Exam Tip
Always double-check your division and ensure you're using the correct numbers from the problem - inventory divided by sales rate, not the reverse.
Common Mistakes to Avoid
- -Dividing sales rate by inventory instead of inventory by sales rate
- -Using incorrect numbers from the problem statement
- -Confusing absorption rate with other market metrics like 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 available inventory at the current sales pace. This calculation is essential for understanding market conditions, with higher absorption rates indicating slower markets and lower rates indicating faster-moving markets. The formula is straightforward: total inventory divided by sales per time period equals the absorption rate in that time period. This metric helps appraisers assess market conditions and supports various valuation approaches by providing insight into supply and demand dynamics.
Background Knowledge
Absorption rate is a key market indicator used in real estate analysis to measure how quickly properties sell in a given market. It's calculated by dividing the total number of properties available by the average number of properties sold per time period, typically expressed in months.
Real-World Application
Appraisers use absorption rates to determine if a market is balanced (6-7 months), favors buyers (8+ months), or favors sellers (under 6 months), which directly impacts property values and marketing time estimates in appraisal reports.
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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