A neighborhood has 450 existing homes, 75 homes under construction, and 125 approved lots. Over the past 12 months, 60 homes were sold. What is the absorption rate in months?
Correct Answer
C) 40.0 months
Absorption rate = Total inventory ÷ Sales rate. Total inventory is homes under construction plus approved lots (75 + 125 = 200). Monthly sales rate is 60 ÷ 12 = 5 per month. Absorption rate = 200 ÷ 5 = 40 months.
Why This Is the Correct Answer
Option C is correct because the absorption rate calculation uses only the future inventory (75 homes under construction + 125 approved lots = 200 total future inventory). The monthly sales rate is 60 sales ÷ 12 months = 5 sales per month. Therefore, 200 ÷ 5 = 40 months to absorb the future inventory. This represents how long it will take to sell all the properties that will come to market, assuming the current sales pace continues.
Why the Other Options Are Wrong
Option A: 7.5 months
7.5 months is incorrect because this appears to calculate only the homes under construction (75) divided by monthly sales (10), using an incorrect monthly sales figure and ignoring the approved lots entirely.
Option B: 9.0 months
9.0 months is incorrect because this likely uses an improper calculation method, possibly dividing total future inventory by an incorrect sales rate or using only partial inventory numbers.
Option D: 130.0 months
130.0 months is incorrect because this appears to include existing homes in the calculation (450 + 75 + 125 = 650 total, but even 650 ÷ 5 = 130), which is wrong since existing homes are not part of absorption rate calculations.
FUMS Formula
FUMS = Future Units ÷ Monthly Sales. Remember 'FUMS' sounds like 'FUMES' - think of future inventory as smoke that needs time to clear from the market.
How to use: When you see absorption rate questions, immediately identify: F (Future inventory only - under construction + approved), U (Units to be absorbed), M (Monthly sales rate), S (Sales pace). Ignore existing homes completely.
Exam Tip
Always double-check that you're using ONLY future inventory (under construction + approved lots) and remember to convert annual sales to monthly sales by dividing by 12.
Common Mistakes to Avoid
- -Including existing homes in the inventory calculation
- -Using annual sales rate instead of monthly sales rate
- -Forgetting to include both under construction AND approved lots in future inventory
Concept Deep Dive
Analysis
Absorption rate measures how long it will take to sell or absorb the current inventory of available properties at the current rate of sales. This is a critical market analysis tool that helps appraisers understand supply and demand dynamics in a specific area. The key insight is that absorption rate only considers future inventory (homes under construction and approved lots), not existing homes already on the market. This metric helps determine whether a market is oversupplied, undersupplied, or in balance, which directly impacts property values and marketability.
Background Knowledge
Absorption rate specifically measures future supply, not current market inventory, because it answers the question of how long new development will take to sell. The calculation always uses: Future Inventory (under construction + approved lots) ÷ Monthly Sales Rate = Absorption Rate in months.
Real-World Application
Appraisers use absorption rates to advise developers on project timing, help lenders assess market risk for construction loans, and determine if new subdivisions will compete heavily with existing inventory, affecting property values 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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