While working on an appraisal of a new house in a tract subdivision, an appraiser measures new-home supply in the market area on the Census Bureau's definitions. Builders report 150 speculative houses permitted, under construction or completed with no sales contract signed or deposit accepted, 15 houses with signed sales contracts, and 20 platted lots with no permit issued and no work begun. Sales contracts have held steady, with 75 signed over the past 5 months, including those 15 houses. What months' supply is indicated?
Correct Answer
C) 10.0 months
A new house is for sale until a sales contract is signed or a deposit is accepted, so supply is the 150 houses with neither, and the 20 lots with no permit or work begun are not yet for sale. A signed contract makes a house sold, so the 15 are already inside the 75 sales, and the pace is 75/5 = 15 per month, giving 150/15 = 10.0 months. Counting the 20 unpermitted lots as supply gives 170/15 = 11.3 months. Adding the contract houses to the sales again gives 90/5 = 18 per month and 8.3 months, and subtracting them from a count that already excludes them gives 135/15 = 9.0 months.
Why This Is the Correct Answer
Option C is correct because the houses for sale are the 150 with no sales contract signed or deposit accepted, and the 75 contracts over 5 months set a pace of 75/5 = 15 per month. Supply is 150/15 = 10.0 months. The 15 contract houses are already counted among the sales, and the 20 lots have no permit or work begun.
Why the Other Options Are Wrong
Option A: 8.3 months
Option A gives 8.3 months, which comes from adding the 15 contract houses to the sales a second time: (75 + 15)/5 = 18 and 150/18 = 8.3. The 75 contracts already include those 15, so the pace is 75/5 = 15 and supply is 150/15 = 10.0 months.
Option B: 9.0 months
Option B gives 9.0 months, which comes from taking the contract houses out of the 150: (150 − 15)/15 = 9.0. The 150 houses have no sales contract or deposit, so nothing needs to come out, and supply is 150/15 = 10.0 months.
Option D: 11.3 months
Option D gives 11.3 months, which comes from counting the 20 platted lots as houses for sale: (150 + 20)/15 = 11.3. A lot with no permit issued and no work begun is not yet a new house for sale on Census definitions, so supply is 150/15 = 10.0 months.
Contract moves it across
Picture two columns, for sale and sold. A signed contract or accepted deposit moves a new house from the first column to the second, and a lot with no permit is in neither column.
How to use: Use this picture when builder data mix unsold houses, contract houses and undeveloped lots.
Exam Tip
With new-home data, assign each line a role before calculating, and check whether a count already excludes or includes the contract houses. Sale dates for new houses on Census definitions are contract dates, not closing dates.
Common Mistakes to Avoid
- -Counting houses with signed contracts as still for sale
- -Adding contract houses to a sales count that already includes them
- -Counting platted lots with no permit or work begun as houses for sale
Concept Deep Dive
Analysis
The arithmetic is short; the skill lies in giving each line of the builder data its role. On Census definitions, a house is sold when the contract is signed or the deposit accepted, not at closing, so a contract house leaves supply and belongs in the sales count. A lot with no permit and no work begun is not yet a house for sale.
Background Knowledge
The Census Bureau's months' supply of new houses is the ratio of houses for sale to houses sold, indicating how long the for-sale inventory would last at the current sales rate. The survey treats a house as sold at contract signing or deposit, not at closing. A house being built to be sold counts as for sale once a permit is issued, or work begins on the footings or foundation in nonpermit areas, if no contract or deposit exists.
Real-World Application
An appraiser working in a new subdivision surveys the area's builders about unsold houses, recent contracts and remaining lots. Before writing the market commentary, the appraiser separates houses with signed contracts from unsold houses and leaves unpermitted lots out of the current supply figure.
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