A neighborhood has 450 homes for sale and the absorption rate is 30 homes per month. What is the current months of inventory?
Correct Answer
B) 15 months
Months of inventory = Total inventory ÷ Absorption rate = 450 homes ÷ 30 homes per month = 15 months. This indicates the time it would take to absorb all current inventory at the current rate.
Why This Is the Correct Answer
Option B is correct because it applies the proper formula: Months of Inventory = Total Inventory ÷ Absorption Rate. With 450 homes for sale divided by 30 homes sold per month, the calculation yields exactly 15 months. This means at the current sales pace, it would take 15 months to sell all available inventory. The math is straightforward division: 450 ÷ 30 = 15.
Why the Other Options Are Wrong
Option A: 12 months
Option A (12 months) results from incorrect calculation, possibly confusing the numbers or using wrong formula components.
Option C: 18 months
Option C (18 months) suggests mathematical error, possibly adding extra time or miscalculating the division.
Option D: 20 months
Option D (20 months) indicates significant calculation error, possibly confusing absorption rate with inventory numbers.
The TIME Formula
T.I.M.E. = Total Inventory ÷ Monthly Elimination (absorption rate). Remember: 'How much TIME to clear the inventory?'
How to use: When you see inventory questions, immediately think T.I.M.E. and set up the division: total houses on top, monthly sales on bottom.
Exam Tip
Always double-check your division by multiplying your answer by the absorption rate - it should equal the total inventory (15 × 30 = 450).
Common Mistakes to Avoid
- -Dividing absorption rate by inventory instead of inventory by absorption rate
- -Confusing daily or weekly rates with monthly rates
- -Forgetting to convert time periods to match (days vs months)
Concept Deep Dive
Analysis
Months of inventory is a critical market analysis metric that measures how long it would take to sell all available properties at the current absorption rate. This calculation helps appraisers and real estate professionals understand market conditions - whether it's a buyer's market (high inventory months) or seller's market (low inventory months). The formula is straightforward: divide total inventory by the monthly absorption rate to determine the time needed to clear current stock. This metric is essential for market condition analysis in appraisal reports and helps establish whether supply and demand are balanced.
Background Knowledge
Absorption rate represents the pace at which properties sell in a given market, typically expressed as units per month. Months of inventory is a key market indicator where 6 months or less typically indicates a seller's market, while 6+ months suggests a buyer's market.
Real-World Application
Appraisers use months of inventory in market condition sections of reports to justify whether it's a balanced, buyer's, or seller's market, which directly impacts 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?
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When analyzing highest and best use, which of the following would make a use financially infeasible?
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