A neighborhood has 240 homes for sale and an average absorption rate of 15 homes per month. What is the months of supply?
Correct Answer
B) 16 months
Why this is correct: Months of supply is the number of homes for sale divided by the absorption rate: 240 ÷ 15 = 16 months. This means it would take 16 months to sell all current inventory at the current pace. Therefore B is correct. Why the other choices are wrong: A, 12 months, would result from 180 ÷ 15, not from the given data. C, 18 months, would result from 270 ÷ 15. D, 20 months, would result from 300 ÷ 15. The correct calculation uses the given 240 homes for sale and the absorption rate of 15 homes per month. Exam tip: Remember 'inventory divided by absorption rate.' A high months-of-supply indicates a slow market; a low number indicates a fast market.
Why This Is the Correct Answer
Option B is correct because months of supply is calculated using the straightforward formula: Current Inventory ÷ Absorption Rate = Months of Supply. In this case, 240 homes for sale divided by 15 homes sold per month equals exactly 16 months. This calculation tells us that if no new homes enter the market and the current sales pace continues, it would take 16 months to sell all existing inventory. The math is direct division with no additional factors or adjustments needed.
Why the Other Options Are Wrong
Option A: 12 months
Option A (12 months) results from incorrect calculation, possibly confusing the absorption rate with inventory or making an arithmetic error in the division.
Option C: 18 months
Option C (18 months) suggests an error in basic division, possibly adding extra months or miscalculating the relationship between inventory and absorption rate.
Option D: 20 months
Option D (20 months) indicates a significant calculation error, possibly multiplying instead of dividing or confusing the variables in the formula.
DIAS Method
DIAS = Divide Inventory by Absorption Speed. Remember 'DIAS' (Spanish for 'days') to recall that you're calculating time periods by dividing what's available by how fast it's selling.
How to use: When you see a months of supply question, immediately think 'DIAS' - take the total inventory number and divide it by the absorption/sales rate to get your time period answer.
Exam Tip
Always double-check your division by multiplying your answer back - 16 months × 15 homes per month should equal 240 homes total inventory.
Common Mistakes to Avoid
- -Multiplying instead of dividing the inventory by absorption rate
- -Confusing which number goes in the numerator versus denominator
- -Adding or subtracting the numbers instead of dividing
Concept Deep Dive
Analysis
Months of supply is a critical market analysis metric that measures the balance between housing supply and demand in a given market. It represents the theoretical time period required to exhaust the current inventory of homes for sale at the prevailing absorption rate. This metric helps appraisers, real estate professionals, and market analysts determine whether a market favors buyers or sellers. A higher months of supply indicates a buyer's market with excess inventory, while a lower months of supply suggests a seller's market with limited inventory relative to demand.
Background Knowledge
Months of supply is a fundamental real estate market indicator used in comparative market analysis and neighborhood studies. Appraisers must understand this concept to properly analyze market conditions and support their valuation conclusions with relevant market data.
Real-World Application
Appraisers use months of supply data in their market analysis sections to demonstrate whether comparable sales occurred in a balanced, buyer's, or seller's market, which can affect the weight given to different comparable properties and support adjustments for market conditions.
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