Census Bureau data for a region show new-home sales at seasonally adjusted annual rates (SAAR) of 594,000 in January, 627,000 in February and 660,000 in March, a rise of 33,000 each month. At the end of March, 495,000 new houses are for sale. Using the Census months'-supply definition and the current (March) sales rate, what months' supply is indicated? Round to one decimal place.
Correct Answer
B) 9.0 months
Months' supply is houses for sale divided by houses sold per month at the current rate. A SAAR is the seasonally adjusted monthly value times 12, so March's monthly rate is 660,000 / 12 = 55,000, and 495,000 / 55,000 = 9.0 months. The 8.6 figure projects the trend to an April rate instead of using the current rate; 9.5 uses the three-month average rate and 10.0 uses January's rate.
Why This Is the Correct Answer
Option B is correct because March's SAAR of 660,000 converts to a monthly rate of 660,000 / 12 = 55,000. Dividing the for-sale inventory of 495,000 by 55,000 gives 9.0 months, using the current sales rate as the Census definition requires.
Why the Other Options Are Wrong
Option A: 8.6 months
Option A, 8.6 months, projects the rising trend one month ahead to an April rate of 660,000 + 33,000 = 693,000, or 57,750 a month, and divides 495,000 by 57,750 to get about 8.6. Months' supply uses the current sales rate, not a projected one; March's 660,000 / 12 = 55,000 a month gives 495,000 / 55,000 = 9.0 months.
Option C: 9.5 months
Option C, 9.5 months, averages the three monthly SAARs to 627,000, converts that to 52,250 per month and divides 495,000 by 52,250 to get about 9.5. The months' supply measure uses the current sales rate, which is March's 55,000 per month, giving 9.0 months.
Option D: 10.0 months
Option D, 10.0 months, uses January's SAAR: 594,000 / 12 = 49,500 and 495,000 / 49,500 = 10.0. January's pace is out of date; the current March rate of 55,000 per month gives 9.0 months.
Divide SAAR by twelve first
Think 'annual back to monthly, then all stock over that monthly pace.' Convert the SAAR to a monthly number, then divide the entire for-sale inventory by it.
How to use: Use this whenever a supply question quotes sales as an annual rate but asks for months.
Exam Tip
When several months of sales rates are given, check which one the question names as current before dividing. Do not average older months or project the trend forward.
Common Mistakes to Avoid
- -Dividing inventory by the SAAR without first converting it to a monthly rate
- -Projecting a rising trend forward instead of using the current rate
- -Averaging older months' rates when the current rate is asked for
Concept Deep Dive
Analysis
This question tests two steps: a SAAR must be converted back to a monthly rate before computing months' supply, and the rate used must be the current one. Months' supply relates inventory to the number of houses currently being sold, so an older month's rate, an average of several months or a projected future rate does not belong in the denominator.
Background Knowledge
The Census Bureau's months' supply is the ratio of houses for sale to houses sold, showing how long current inventory would last at the current sales rate if no more were built. Monthly sales are often published as seasonally adjusted annual rates, which are the seasonally adjusted monthly value multiplied by 12.
Real-World Application
An appraiser reviewing a builder's subdivision in a growing region cites the latest Census release in a market commentary. Converting the reported annual rate to a monthly pace lets the appraiser express regional new-home inventory in months, comparable to the local months-of-supply figures from MLS data.
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