Market analysis shows 200 homes sold in the past 12 months with an average marketing time of 45 days. Currently 180 homes are listed for sale. What is the monthly absorption rate?
Correct Answer
B) 16.7 homes per month
Why this is correct: The monthly absorption rate estimates how many units the market sells (absorbs) per month, based on historical data. It is calculated as the total number of sales over a period divided by the number of months in that period. Here, 200 homes sold in the past 12 months. Therefore, Absorption Rate = 200 homes / 12 months = 16.666..., which rounds to 16.7 homes per month. The current listings and marketing time are extra data not needed for this basic calculation. Why the other choices are wrong: "22.5 homes per month" might incorrectly use the marketing time (e.g., 200/ (45/30)). "20.0 homes per month" could be a miscalculation or misuse of the current listing count. "15.0 homes per month" is not supported by the given sales data. Exam tip: The basic absorption rate formula is: Total Sales / Time Period. Ensure the time units are consistent (e.g., months).
Why This Is the Correct Answer
Option B correctly applies the absorption rate formula: 200 homes sold ÷ 12 months = 16.67 homes per month (rounded to 16.7). This calculation uses only the relevant data - total sales over the time period. The current inventory of 180 homes and the 45-day average marketing time are additional market indicators but don't factor into the basic absorption rate calculation.
Why the Other Options Are Wrong
Option A: 22.5 homes per month
This answer of 15.0 appears to be an arbitrary calculation that doesn't follow the standard absorption rate formula of total sales divided by time period.
Option C: 20.0 homes per month
This answer incorrectly uses current inventory (180 homes) in the calculation, possibly dividing it by 9 months, which is not the proper absorption rate methodology.
Option D: 15.0 homes per month
This answer appears to incorporate the marketing time data incorrectly, possibly trying to adjust for the 45-day average, but absorption rate is strictly historical sales divided by time period.
SOLD History Rule
Remember 'SOLD' - Sales Over Length of Duration. Only use historical SOLD properties divided by the time period. Ignore current inventory, marketing time, and other market data when calculating basic absorption rate.
How to use: When you see absorption rate questions, immediately identify the SOLD homes and time period. Divide sales by months and ignore all other numbers in the problem that might be distractors.
Exam Tip
Circle or highlight only the two numbers you need: total sales and time period in months. Cross out distracting information like current inventory and marketing times to avoid calculation errors.
Common Mistakes to Avoid
- -Including current inventory in the calculation
- -Using marketing time to adjust the basic absorption rate
- -Confusing absorption rate with months of inventory calculation
Concept Deep Dive
Analysis
The absorption rate is a fundamental market analysis metric that measures the rate at which available homes are sold in a specific market during a given time period. It's calculated by dividing the total number of homes sold by the time period, providing insight into market velocity and demand. This metric helps appraisers understand market conditions and is essential for determining how quickly properties move in a given area. The absorption rate is independent of current inventory levels and focuses solely on historical sales performance to establish a baseline market pace.
Background Knowledge
Absorption rate measures market velocity by calculating how many properties sell per unit of time, typically monthly. It's calculated as: Total Sales ÷ Time Period = Absorption Rate, and helps appraisers assess market conditions and predict future sales patterns.
Real-World Application
Appraisers use absorption rates to advise clients on market timing, help determine reasonable marketing periods for subject properties, and support market condition adjustments in the sales comparison approach.
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