A neighborhood's absorption rate is calculated as 24 homes sold per month with a current inventory of 180 homes. What is the months of supply?
Correct Answer
B) 7.5 months
Months of supply is calculated by dividing current inventory by absorption rate: 180 homes ÷ 24 homes per month = 7.5 months of supply.
Why This Is the Correct Answer
Option B is correct because months of supply is calculated using the simple formula: Current Inventory ÷ Absorption Rate = Months of Supply. With 180 homes in inventory and 24 homes selling per month, the calculation is 180 ÷ 24 = 7.5 months. This means at the current sales pace, it would take 7.5 months to sell all available inventory. This is a straightforward division problem that directly applies the standard market analysis formula.
Why the Other Options Are Wrong
Option A: 6.5 months
6.5 months is incorrect because it suggests a faster absorption rate than what the data supports, possibly resulting from calculation error or misreading the given numbers.
Option C: 8.0 months
8.0 months is incorrect and likely results from rounding error or miscalculation, perhaps confusing the absorption rate calculation with months of supply.
Option D: 156 months
156 months is completely incorrect and appears to result from multiplying instead of dividing (24 × 6.5 = 156), showing a fundamental misunderstanding of the formula.
I-A-M Formula
Remember 'I-A-M' for Inventory ÷ Absorption = Months of supply. Think 'I AM calculating months of supply by dividing inventory by absorption rate.'
How to use: When you see absorption rate questions, immediately identify the Inventory number and Absorption rate, then apply I-A-M: divide Inventory by Absorption to get Months.
Exam Tip
Always double-check that you're dividing inventory by absorption rate, not the reverse - a common mistake that leads to dramatically wrong answers like option D.
Common Mistakes to Avoid
- -Multiplying instead of dividing the two numbers
- -Confusing absorption rate with months of supply in the calculation
- -Mixing up which number goes in the numerator versus denominator
Concept Deep Dive
Analysis
This question tests understanding of market absorption analysis, a critical component in real estate appraisal and market analysis. The absorption rate measures how quickly homes are selling in a given market, while months of supply indicates how long it would take to sell all current inventory at the current pace. This metric is essential for determining market conditions - whether it's a buyer's market, seller's market, or balanced market. Understanding this relationship helps appraisers assess market trends and make informed adjustments to comparable sales.
Background Knowledge
Market absorption analysis requires understanding the relationship between inventory levels and sales velocity to determine market equilibrium. Generally, 6 months of supply indicates a balanced market, less than 6 months suggests a seller's market, and more than 6 months indicates a buyer's market.
Real-World Application
Appraisers use months of supply to support market condition adjustments in the sales comparison approach, helping justify upward or downward adjustments based on whether the market favors buyers or sellers at the time of the appraisal.
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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