If 24 similar units sold in a subdivision over the past 12 months, and there are currently 18 units available for sale, what is the absorption rate?
Correct Answer
A) 2.0 units per month
Why this is correct: Absorption rate (in units per month) measures the pace of sales. Calculation: Total units sold (24) ÷ Time period (12 months) = 2.0 units per month. The 18 available units represent inventory, not the absorption rate. Why the other choices are wrong: '18 units per month' confuses inventory with sales pace. '1.33 units per month' might result from dividing inventory by sales. '9.0 months' is the months of supply (inventory ÷ absorption rate), not the absorption rate itself. Exam tip: Absorption rate = Units sold per period; Months of supply = Inventory ÷ Absorption rate.
Why This Is the Correct Answer
Option B is correct because absorption rate is calculated as units sold divided by time period. With 24 units sold over 12 months, the calculation is 24 ÷ 12 = 2.0 units per month. This represents the average rate at which units are being absorbed by the market. The formula is straightforward: Absorption Rate = Units Sold ÷ Time Period.
Why the Other Options Are Wrong
SOLD Over TIME
Remember 'SOLD Over TIME' - Absorption rate is always SOLD units divided by TIME period. Think of it as how fast the market 'absorbs' or 'drinks up' the available properties.
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 current inventory numbers when calculating the rate itself.
Exam Tip
Always read carefully to distinguish between absorption rate (units per time period) and marketing time (time period for current inventory) - they use the same numbers but in different calculations.
Common Mistakes to Avoid
- -Confusing absorption rate with marketing time calculation
- -Using current inventory instead of sold units in the numerator
- -Mixing up the formula by putting time period in the numerator instead of denominator
Concept Deep Dive
Analysis
Absorption rate is a fundamental market analysis metric that measures the pace at which properties sell in a specific market over a given time period. It is calculated by dividing the number of units sold by the time period, expressed as units per month or units per year. This metric helps appraisers and real estate professionals understand market velocity and predict how long it will take to sell remaining inventory. The absorption rate is crucial for determining market conditions (buyer's vs. seller's market) and estimating marketing time for properties.
Background Knowledge
Absorption rate measures market velocity by calculating how quickly properties sell in a given area over a specific time period. It's expressed as units per time period (usually monthly) and helps determine market conditions and estimate how long current inventory will take to sell.
Real-World Application
Appraisers use absorption rates to estimate marketing time in their reports, helping lenders understand how quickly a property might sell if foreclosed, and helping developers determine the pace of releasing new units to market.
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