An appraiser finds that a subdivision has 84 active listings and that 21 homes sold over the last three months. What months of supply is indicated?
Correct Answer
D) 12 months
Months of supply = active listings ÷ monthly sales pace. The pace is 21 ÷ 3 = 7 sales per month, so 84 ÷ 7 = 12 months. Dividing by the quarter’s total sales, or inverting the ratio, gives the wrong figure.
Why This Is the Correct Answer
Option D is correct because the monthly sales pace is 21 ÷ 3 = 7 sales per month, and 84 active listings ÷ 7 = 12 months of supply. Months of supply is the ratio of homes for sale to homes sold per month. It estimates how long current inventory would last at the current sales rate if no new listings were added.
Why the Other Options Are Wrong
Option A: 4 months
Option A, 4 months, comes from dividing by the quarter's total sales instead of the monthly pace: 84 ÷ 21 = 4. The correct calculation is 84 ÷ (21 ÷ 3) = 84 ÷ 7 = 12 months.
Option B: 1.3 months
Option B, 1.3 months, comes from multiplying the quarter's sales by 3: 84 ÷ (21 × 3) = 84 ÷ 63 = about 1.3. The quarter's sales should be divided by 3, giving 7 per month, and 84 ÷ 7 = 12 months.
Option C: 0.25 months
Option C, 0.25 months, comes from inverting the ratio: 21 ÷ 84 = 0.25. Months of supply puts listings on top: 84 ÷ 7 = 12 months.
Listings over monthly sales
Months of supply equals listings divided by sales per month, so convert any multi-month sales total to a monthly pace first.
How to use: Use this whenever sales are given for a period longer than one month.
Exam Tip
Check the time period of the sales figure; a quarter's sales must be divided by 3 before computing months of supply.
Common Mistakes to Avoid
- -Dividing listings by total quarterly sales
- -Inverting the ratio of listings to sales
- -Multiplying instead of dividing the period sales by the number of months
Concept Deep Dive
Analysis
This question tests the months-of-supply calculation. First convert the quarter's sales into a monthly sales pace, then divide active listings by that monthly pace. Each distractor results from skipping or reversing one of those steps.
Background Knowledge
Months of supply relates inventory to the rate of sales. A lower figure suggests inventory is tight relative to sales, while a higher figure suggests more inventory relative to sales. Appraisers use it with other indicators such as price trends and days on market to describe market conditions.
Real-World Application
An appraiser pulls MLS data showing 84 active listings and 21 closed sales over the past three months in a subdivision. Converting to 7 sales per month, the appraiser reports about 12 months of supply and considers what that implies about competition among sellers.
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