A residential subdivision has sold 24 lots in the past 12 months, with 96 lots remaining for sale. What is the absorption rate per month?
Correct Answer
A) 2.0 lots per month
Absorption rate is calculated by dividing units sold by the time period. 24 lots sold ÷ 12 months = 2.0 lots per month. This metric helps estimate how long it will take to sell remaining inventory.
Why This Is the Correct Answer
Option A is correct because absorption rate is calculated using the simple formula: units sold ÷ time period. In this case, 24 lots were sold over 12 months, so 24 ÷ 12 = 2.0 lots per month. This straightforward calculation gives us the average monthly absorption rate for the subdivision. The remaining inventory (96 lots) is not used in calculating the absorption rate itself, though it would be used to project how long it might take to sell the remaining lots at the current absorption rate.
Why the Other Options Are Wrong
Option B: 4.0 lots per month
Option B incorrectly doubles the correct answer, possibly from confusing the calculation or misreading the given data. This might result from incorrectly using 48 lots instead of 24 lots, or dividing by 6 months instead of 12 months.
Option C: 8.0 lots per month
Option C represents four times the correct answer, which could result from dividing the remaining inventory (96 lots) by 12 months instead of using the actual sales data (24 lots sold).
Option D: 12.0 lots per month
Option D equals the time period itself (12 months) and likely results from confusing the calculation entirely, possibly by dividing 24 by 2 or some other mathematical error unrelated to the proper absorption rate formula.
SOLD Over TIME
Remember 'SOLD Over TIME' - Absorption rate = Units SOLD divided by TIME period. Think of it as how fast the market 'absorbs' or 'drinks up' the available inventory, like a sponge absorbing water at a measurable rate.
How to use: When you see an absorption rate question, immediately identify the SOLD units and the TIME period, then divide SOLD by TIME. Ignore any remaining inventory numbers - they're used for projections, not for calculating the absorption rate itself.
Exam Tip
Always double-check that you're using the correct numbers in your calculation - units actually sold (not remaining inventory) divided by the actual time period given. Write out the formula before calculating to avoid confusion.
Common Mistakes to Avoid
- -Using remaining inventory instead of units sold in the calculation
- -Confusing the time period (using quarters instead of months, etc.)
- -Adding sold units and remaining inventory together before dividing
Concept Deep Dive
Analysis
Absorption rate is a fundamental market analysis metric that measures the pace at which available real estate inventory is sold or absorbed by the market over a specific time period. It is calculated by dividing the number of units sold by the time period, typically expressed as units per month or units per year. This metric is crucial for appraisers, developers, and real estate professionals to understand market velocity and predict future sales patterns. The absorption rate helps determine market conditions (buyer's vs. seller's market) and assists in pricing strategies and development timing decisions.
Background Knowledge
Absorption rate is a key market analysis tool that measures market velocity and helps predict future sales performance. Understanding this metric is essential for highest and best use analysis, market value determinations, and feasibility studies in real estate appraisal.
Real-World Application
Appraisers use absorption rates to support highest and best use conclusions for vacant land, to estimate marketing time for subject properties, and to analyze the strength of local markets when selecting comparable sales and making market condition adjustments.
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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