In January there was a large drop in the number of new houses sold, be

Question

In January there was a large drop in the number of new houses sold, because interest rates for mortgages were falling and many consumers were waiting to see how low the rates would go. This large sales drop was accompanied by a sharp rise in the average price of new houses sold.

Which of the following, if true, best explains the sharp rise in the average price of new houses?

(A) Sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay.

(B) Labor agreements of builders with construction unions are not due to expire until the next January.

(C) The prices of new houses have been rising slowly over the past three years because there is an increasing shortage of housing.

(D) There was a greater amount of moderate-priced housing available for resale by owners during January than in the preceding three months.

(E) Interest rates for home mortgages are expected to rise sharply later in the year if predictions of increased business activity in general prove to be accurate

ChrisLele · Accepted Answer

The key here is the term "average price of home."

In answer choice (A) it gives us a concrete reason for why the average price of homes would increase: the number of expensive homes sold was higher than usual. Since the rest of the housing market - cheap homes to average priced homes - is not doing as well, the average price of homes sold is going to increase. Even if the number of expensive homes sold remained the same, the average price would still increase if the number of medium-priced homes sales decreased.

In answer (C), we are no longer dealing with averages but with number of units sold. However, we are not worried here about the number of houses sold per se, but the average price of homes sold.

Hope that helps

TehJay · Answer

I said (A) immediately. The argument is that the overall number of houses being sold is down due to people waiting for interest rates on mortgages to drop to a minimum. If at the same time, the average price of houses being sold is going up, it follows that the houses still being sold cost more money. The people who would buy more expensive houses wouldn't be (as) concerned with the interest rates on mortgages, so they're still buying their homes.

(C) doesn't work because it mentions a housing shortage, but if sales are down, there would actually be an EXCESS of houses, not a shortage.

(C) doesn't work because it mentions a housing shortage, but if sales are down, there would actually be an EXCESS of houses, not a shortage.

cipher · Answer

Kind of late to reply but I guess its better to be late than never :D
I got to the conclusion thru POE,

dkverma · Answer

If more High Priced houses are sold then average price of the houses sold will increase.

Hence A.

anordinaryguy · Answer

Option A seems to be the best answer

My explanation:

average price of new houses sold (Z) = 
((average price of High-price house sold * Nbr of High-price houses sold) + (average price of Low-price house sold * Nbr of Low-price houses sold)) / (Nbr of High-price houses sold + Nbr of Low-price houses sold)

That is

Avg = (A*B ) + (C*D))/(B+D) 
Where A (average price of High-price house sold) < C (average price of Low-price house sold)
and B (Nbr of High-price houses sold) is constant but D (Nbr of Low-price houses sold) has Decreased

So its quiet evident that "average price of new houses sold (Z)" would increase

BrushMyQuant · Answer

IMO A
for me A and E were tempting!
Reason for A:
If the sale of expensive houses is not affected then the avg price of the new houses sold will be high as mostly the higher priced houses r getting sold!

Reason for E:
Although, E sounded good too, but even if the rates are expected to increase then also it does not mean that the prices of the new houses sold will increase. Also, nothing can be concluded about the average price of the new houses sold.

Hence, i Chose A

jlgdr · Answer

I guess A but even then is not very clear because in no part of the argument does it mention the share of higher priced houses on the overall market. Mind you, if these were only 1% of the total market then it would not cause average prices of new houses to increase sharply You get the point Cheers J

pqhai · Answer

Hello jlgdr.

My opinion, the wording is a bit tricky. Let read the last sentence one more time. 
"This large sales drop was accompanied by a sharp rise in the average price of new houses  sold "

The argument just says that the average price of  houses that were SOLD  increased sharply. On the other hand, the argument provides facts of TOTAL new house market, but the  last sentence ONLY focus on A SUB-DIVISION of the market - new houses  SOLD  . Be aware, the argument does not say the average price of ALL new houses increased sharply. Readers may be fallen in trap by thinking that the argument said that the average price of new houses  in general  had increased sharply.

Back to option A. 
Option A: Sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay.
A only focuses on houses that were sold. Because their price were not affected by the sale drop, their average price could increase. Clearly, the paradox is resolved.

Your example " if these were only 1% of the total market then ...... " does not help to evaluate the argument. It does not matter 1% or 50%, because the argument does not talk about average price of total new houses market but a small segment - new houses  sold .

Hope it's clear.

semwal · Answer

1. PEOPLE ARE NOT BUYING HOUSES AS THEY WANT TO SEE FURTHER FALL IN INTEREST RATES.....as in jan this year..

2. SINCE SALE OF HOUSES LESS, THEIR AVERAGE PRICE SHOULD FALL.....

3. HOWEVER, SHARP INCREASE IN AVERAGE PRICE OF HOUSES..... .

WE NEED TO EXPLAIN......

AVERAGE PRICE WILL INCREASE IF SALE OF SOME HIGH PRICE HOUSES UNAFFECTED BY THE DECREASE IN INTEREST RATE PHENOMENA...SUCH HOUSES PRICE WILL CONTINUE TO ESCALATE AND ALSO will increase the overall average price of all houses.....

(A) Sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay.   correct  
(B) Labor agreements of builders with construction unions are not due to expire until the next January.  WHAT IS THIS TO DO WITH THE ARGUMENT! WRONG... 
(C) The prices of new houses have been rising slowly over the past three years because there is an increasing shortage of housing.  There may have been shortage of housing in last three years.... BUT FROM JAN THERE IS AN INCREASE ... AND WE ARE TALKING OF THAT.... HENCE WRONG... 
(D) There was a greater amount of moderate-priced housing available for resale by owners during January than in the preceding three months.  WE ALREADY KNOW THIS... IF PEOPLE WAIT... AVAILABILITY WILL INCREASE... HENCE WRONG.... 
(E) Interest rates for home mortgages are expected to rise sharply later in the year if predictions of increased business activity in general prove to be accurate.  WE are not worried about what will happen to interest rates......IN FUTURE.... HENCE WRONG...

KUDOS IF YOU PLEASE....

BrentGMATPrepNow · Answer

Always identify the paradox.

Here it's   "Even though the demand for houses dropped, the AVERAGE sale price of houses rose sharply"

Answer choice A explains how could such a scenario could occur.

Let's say that, in a typical January, 10 houses are sold.
The sale prices are typically, $100K, $100K, $100K, $100K, $200K, $200K, $200K, $200K, $900K, and $900K, for an AVERAGE sale price of $300K

Answer choice A says that the rich people continued to buy houses while the other potential buyers (who might buy the $100K and $200K houses) waited to see what happened with mortgage rates.
So, of the 10 houses what would typically sell, only the expensive $900K houses sold.
So, if the two $900K houses sold, the AVERAGE house price would increase sharply from $300K to $900K

Answer: A

Cheers,
Brent

1616 · Answer

Hello All,

I am confused how the answer is A, The stem says that sales of High priced houses are unaffected lets say before january there were 100 houses (10 High 90 low or med), now since 10 high price houses remain same in terms of cost and other houses have lower rates, then the entire average should be lower and higher. Please let me know if my understanding is clear or not?

1616 · Answer

Hello All,

I am a non-native english speaker and unable to understand the exact meaning of this line, "because interest rates for mortgages were falling". Can someone please explain the same.

DmitryFarber · Answer

1616

It's hard to explain if I don't know which parts of that phrase caused the trouble, but I will try. That phrase tells us one of the reasons that fewer houses were sold. At the time, the rate of interest that people would have to pay on a home loan (mortgage) was gradually decreasing. This is *good* for home buyers--lower interest rates make home loans more affordable. However, because of this, buyers were waiting to see if the rate would go even lower. It's similar to watching a stock price go down. If the stock cost $100 last week and now it is $80, some people might buy, but others might wait to see if the price goes even lower. That's the behavior the argument describes.

bronaugust · Answer

To solve this question, let us deploy    IMS's four-step technique   .

STEP #1  ->   IDENTIFY THE QUESTION TYPE

Let us read the question stem to identify the question type. The stem states, 'Which of the following, if true, best explains the sharp rise in the average price of new houses?' What we have is an  explain/resolve the paradox  question.

Now that the question type is identified, let us proceed to the second step.

STEP #2  ->   FIGURE OUT THE PARADOX

To figure out the paradox, we need to read and understand the passage.

FACT #1   -> In January there was a large drop in the number of new houses sold.

FACT #2   -> This drop was because interest rates for mortgages were falling and many consumers were waiting to see how low the rates would go.

FACT #3   -> This large sales drop was accompanied by a sharp rise in the average price of new houses sold.

PARADOX:   Despite the large drop in the number of new houses sold, there was a sharp rise in the average price of new houses sold.

STEP #3  ->   FRAME A SHADOW ANSWER

To frame a shadow answer, we need to know what the right answer is supposed to do. Here, the right answer should tell us how there was a sharp rise in the average price of new houses sold despite the large drop in the number of new houses sold.

SHADOW ANSWER:   Any situation that tells us how there was a sharp rise in the average price of new houses sold despite the large drop in the number of new houses sold.

STEP #4  ->   ELIMINATE INCORRECT OPTIONS

(A) Sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay. -   MATCHES THE SHADOW ANSWER   -  If sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay, it means low-priced and moderate-priced houses witnessed a drop in sales, ultimately leading to a sharp increase in the average price of new houses sold.  -   KEEP

(B) Labor agreements of builders with construction unions are not due to expire until the next January. -   NOT A MATCH   -  If labor agreements of builders with construction unions are not due to expire until the next January, will we have any idea regarding what led to the sharp rise in the average price of new houses? No!  -   ELIMINATE

(C) The prices of new houses have been rising slowly over the past three years because there is an increasing shortage of housing. -   NOT A MATCH   -  Does not tell us how the average price of new houses sold went up sharply in January.  -   ELIMINATE

(D) There was a greater amount of moderate-priced housing available for resale by owners during January than in the preceding three months. -   NOT A MATCH   -  Even if there was a greater amount of moderate-priced housing available for resale during January than in the preceding three months, how did the average price of new houses sold rise sharply?  -   ELIMINATE

(E) Interest rates for home mortgages are expected to rise sharply later in the year if predictions of increased business activity in general prove to be accurate. -   NOT A MATCH   - Again, does not tell us why or how the average price of new houses sold went up sharply in January. -   ELIMINATE

Hence, A is the correct answer.

Nymeria26 · Answer

KarishmaB ,  GMATNinja , can you please explain why option E is irrelevant.

DmitryFarber · Answer

Nymeria26

E might help us to make predictions about what will happen next, but the question is asking us to explain what already happened. We're told that home sales were down because people were waiting for interest rates to bottom out. If E is true, perhaps people will start buying soon before interest rates go up again. But this doesn't explain why house prices went up in January, while sales were still low. That's what the question is asking us to explain.

ashishaj_321 · Answer

Stem mentions that average price of Homes to be sold is higher. Consider this case: There was 50 Houses of 1 $ and 50 houses of 10 $(suppose). Average price is : (50*1 + 50*10)/100 =5.5 $ Now, if Small price homes are not sold , then new Avg price : 50*10/50 = 10$. Hope it clarifies your doubt.

agrasan · Answer

Let's first understand what the given information is trying to say:
There was a large drop in Jan month in number of new houses sold because mortgage rates have been falling and many consumers were still waiting to see how low those rates will eventually reach. Despite this sales drop, average prices of new houses sold increased sharply instead of declining.

(A) Sales of higher-priced houses were unaffected by the sales drop because their purchasers have fewer constraints limiting the total amount they pay.
  Explains , so what option says is we have two classes of house buyers: A and B. A were those who were waiting to see how low rates will go whereas B didn't worry about those rates, they simply had enough money to buy a house they wanted to do so.

(B) Labor agreements of builders with construction unions are not due to expire until the next January.
  Doesn't explain , what's going to happen in future doesn't explain what happened in past January which led to an increase in average prices for new houses sold.

(C) The prices of new houses have been rising slowly over the past three years because there is an increasing shortage of housing.
  Doesn't explain , this option seems wrong due to two reasons:  first , we already know that average prices increased from the argument,  second , it is talking about three year trend instead of January.

(D) There was a greater amount of moderate-priced housing available for resale by owners during January than in the preceding three months.
  Doesn't explain , this option seems wrong due to two reasons:  first , there is no point of comparison between January and preceding 3 months,  second ,  resale  doesn't refer to new houses.

(E) Interest rates for home mortgages are expected to rise sharply later in the year if predictions of increased business activity in general prove to be accurate
  Doesn't explain , this option talks about future trend instead of explaining what happened in past January.

Yudhajit22 · Answer

Can someone please explain these 2 points regarding answer option A ?
1) We dont know if the volume of High priced houses sold increased or not ? 
2) We dont know if the prices of these high priced houses went up or not ?

Then how do we understand if the average went up ? (The low and moderately priced houses are still low in sales volume )

In January there was a large drop in the number of new houses sold, be

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In January there was a large drop in the number of new houses sold, be

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