A project pipeline contains 75 homes under construction and 125 future lots. All 200 will enter the same market, no other inventory will enter, and all will sell at the historical pace of 60 sales per year. How many months would absorption take?
Correct Answer
D) 40.0 months
Monthly sales = 60/12 = 5; months of inventory = 200/(60/12) = 40.0 months. Keep the stated numerator, denominator and units distinct. Common errors: dividing by the annual pace and reporting years as months gives 3.3 months; counting only the homes under construction gives 15.0 months; counting only the future lots gives 25.0 months.
Why This Is the Correct Answer
Option D is correct because the monthly sales pace is 60/12 = 5 sales per month. The pipeline includes 75 homes under construction plus 125 future lots, for 200 units. Dividing 200 by 5 gives 40.0 months to absorb the supply.
Why the Other Options Are Wrong
Option A: 3.3 months
Option A, 3.3 months, divides by the annual pace and reports years as months: 200/60 = 3.3. That is about 3.3 years; at 5 sales per month, 200/5 = 40.0 months.
Option B: 15.0 months
Option B, 15.0 months, counts only the homes under construction: 75/5 = 15.0. All 200 units enter the market, so the correct result is 200/5 = 40.0 months.
Option C: 25.0 months
Option C, 25.0 months, counts only the future lots: 125/5 = 25.0. Adding the 75 homes under construction gives 200 units, and 200/5 = 40.0 months.
Units over monthly pace
Absorption time is total units divided by sales per month. Convert annual sales to monthly first.
How to use: Use this formula for any pipeline or project absorption question.
Exam Tip
Include all units the question says enters the market, and convert annual figures to monthly before dividing.
Common Mistakes to Avoid
- -Using the annual pace and reading the result as months
- -Counting only part of the pipeline
- -Forgetting to convert yearly sales to a monthly pace
Concept Deep Dive
Analysis
This question tests calculating absorption time from an annual sales pace. Convert 60 sales per year to 5 sales per month, then divide the full 200-unit pipeline by that pace: 200/5 = 40.0 months. Include all units and keep the time units consistent.
Background Knowledge
Absorption analysis estimates how long it will take the market to take up a given supply. Months of supply equals total units divided by the monthly absorption rate. Appraisers and analysts use this to judge marketing time and risk for development projects.
Real-World Application
An appraiser reviewing a subdivision with 75 homes under construction and 125 lots finds the market absorbs about 60 homes a year. The appraiser estimates 40 months to sell out under those assumptions. That marketing period affects the project's present value.
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A local study of one market segment finds that inventory has historically been balanced at about five months, give or take one month. Current inventory in that segment is five months. Based on the local study, which range of months describes a balanced market for this segment?