An appraiser determines that 240 homes sold in a market area over the past 12 months, and there are currently 60 homes listed for sale. What is the absorption rate in months?
Correct Answer
A) 3.0 months
Absorption rate = Current inventory ÷ Average monthly sales. Monthly sales = 240 ÷ 12 = 20 homes per month. Absorption rate = 60 ÷ 20 = 3.0 months.
Why This Is the Correct Answer
Option A is correct because the calculation follows the proper absorption rate formula. First, we calculate the average monthly sales: 240 homes sold ÷ 12 months = 20 homes per month. Then we apply the absorption rate formula: 60 current listings ÷ 20 monthly sales = 3.0 months. This means at the current sales pace, it would take 3 months to absorb all current inventory.
Why the Other Options Are Wrong
Option B: 4.0 months
Option B (4.0 months) is incorrect because it likely results from miscalculating the monthly sales rate or making an arithmetic error in the division process.
Option C: 5.0 months
Option C (5.0 months) is incorrect and might result from dividing 60 by 12 instead of using the proper monthly sales rate of 20 homes per month.
Option D: 20.0 months
Option D (20.0 months) is incorrect and appears to confuse the monthly sales rate (20 homes) with the absorption rate, or incorrectly uses 240 total sales instead of monthly sales in the denominator.
CIA Formula
CIA = Current Inventory ÷ Average monthly sales. Remember 'CIA investigates the market' - they divide current evidence (inventory) by monthly activity (sales rate).
How to use: When you see absorption rate questions, immediately think 'CIA' and set up the division: current listings on top, monthly sales rate on bottom. Always convert annual sales to monthly first.
Exam Tip
Always convert annual sales data to monthly by dividing by 12 before calculating absorption rate. Double-check your arithmetic and ensure you're using monthly sales, not total annual sales, in the denominator.
Common Mistakes to Avoid
- -Using total annual sales (240) instead of monthly sales (20) in the denominator
- -Forgetting to convert annual data to monthly by dividing by 12
- -Confusing the formula and putting monthly sales in the numerator instead of current inventory
Concept Deep Dive
Analysis
Absorption rate is a critical market analysis metric that measures how long it would take to sell all current inventory at the current pace of sales. It's calculated by dividing the current inventory of homes for sale by the average monthly sales rate. This metric helps appraisers understand market conditions - lower absorption rates indicate faster-moving markets (seller's market), while higher rates suggest slower markets (buyer's market). The absorption rate is essential for determining market trends and can influence property values and marketing strategies.
Background Knowledge
Absorption rate is a key market indicator that measures supply and demand dynamics in real estate markets. Appraisers use this metric to assess market conditions, with rates under 6 months typically indicating a seller's market and rates over 6 months suggesting a buyer's market.
Real-World Application
Real estate agents use absorption rates to advise sellers on pricing strategies and timing. In a market with a 3-month absorption rate like this example, sellers have good leverage for pricing, while a 12-month rate might suggest the need for competitive pricing or waiting for better market conditions.
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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