Definition
Economic Obsolescence is a form of depreciation that stems from external factors resulting in the decline of a property’s value. Unlike physical deterioration due to aging or lack of maintenance, economic obsolescence is caused by circumstances outside the property owner’s control. Examples include changes in the surrounding environment, such as construction of a nearby industrial facility, regulatory changes, economic downturns, or shifts in property demand due to new developments.
Examples
- Industrial Development: A high-end residential property may significantly depreciate in value if an industrial plant is constructed nearby due to potential noise, pollution, or decreased desirability of the location.
- Economic Downturn: Commercial properties might experience economic obsolescence during a recession when businesses close down, reducing demand for retail space.
- Traffic Increase: A suburban neighborhood might suffer economic obsolescence if a major highway expansion leads to increased traffic congestion, making the area less appealing for potential homeowners.
- Zoning Law Changes: Changes in zoning laws that allow for different types of land use next to a property can also cause a drop in value due to an altered neighborhood character.
Frequently Asked Questions
Q: Can economic obsolescence be prevented?
A: Economic obsolescence generally cannot be prevented because it is caused by external factors beyond the property owner’s control.
Q: How is economic obsolescence factored into property appraisals?
A: Appraisers consider various factors, including the external economic environment, surrounding developments, and market trends, to determine the extent of economic obsolescence and its impact on property value.
Q: Is economic obsolescence the same as functional obsolescence?
A: No, economic obsolescence is due to external factors, while functional obsolescence refers to a decrease in property value due to outdated designs, features, or layouts that are no longer desirable.
Q: Does economic obsolescence affect residential and commercial properties similarly?
A: Yes, both residential and commercial properties can be affected by economic obsolescence, although the specific factors and impacts might differ based on property type and market conditions.
- Depreciation: A reduction in the value of an asset over time, due to wear and tear or becoming outdated.
- Appraisal: The professional assessment of a property’s market value.
- Functional Obsolescence: A reduction in property value due to outdated features or poor design.
- Market Value: The estimated amount for which property should exchange on the date of valuation between a willing buyer and seller.
- Physical Deterioration: Loss of property value due to material degradation and maintenance issues.
Online References to Online Resources
Suggested Books for Further Studies
- “The Appraisal of Real Estate” by Appraisal Institute
- “Real Estate Principles: A Value Approach” by David C. Ling and Wayne R. Archer
- “Property Valuation” by Peter Boyle and Michael DiPasquale
- “Real Estate Finance & Investments” by William B. Brueggeman and Jeffrey D. Fisher
Fundamentals of Economic Obsolescence: Real Estate Basics Quiz
### How does economic obsolescence differ from physical deterioration?
- [ ] Economic obsolescence results from aging buildings.
- [ ] Economic obsolescence results from poor maintenance.
- [x] Economic obsolescence results from external factors.
- [ ] Physical deterioration concerns external environments.
> **Explanation:** Economic obsolescence results from factors outside the property, such as economic shifts or nearby developments, while physical deterioration arises from aging or maintenance issues.
### Which of the following is a typical cause of economic obsolescence?
- [ ] A leaking roof
- [ ] Outdated electrical system
- [x] Construction of an industrial plant nearby
- [ ] Peeling paint
> **Explanation:** Economic obsolescence is caused by external factors, such as nearby construction or industrial activity affecting property desirability.
### What must be considered during the appraisal of a property affected by economic obsolescence?
- [ ] The cost of repainting the house
- [ ] The historical electricity bills
- [x] The external economic environment and surrounding developments
- [ ] The property's original purchase price
> **Explanation:** Appraisers need to consider external economic conditions and nearby developments that could impact the property's market value.
### Why can economic downturns cause economic obsolescence in commercial properties?
- [x] They reduce demand for retail and office space
- [ ] They age the buildings
- [ ] They raise maintenance costs
- [ ] They make landscaping more expensive
> **Explanation:** Economic downturns can lead to business closures and reduced demand for commercial spaces, thereby impacting property values.
### Which aspect of a property is directly affected by economic obsolescence?
- [ ] The structural integrity
- [x] The market value
- [ ] The number of rooms
- [ ] The color of the building
> **Explanation:** Economic obsolescence affects the market value of a property due to external influences beyond the owner's control.
### Can functional obsolescence be considered part of economic obsolescence?
- [ ] Yes, both relate to external factors.
- [ ] Yes, if the building is very old.
- [ ] No, functional obsolescence only involves external factors.
- [x] No, functional obsolescence involves internal issues, whereas economic obsolescence involves external factors.
> **Explanation:** Functional obsolescence relates to the property's internal aspects, whereas economic obsolescence is due to external factors.
### Which property type can be affected by economic obsolescence?
- [x] Both residential and commercial properties
- [ ] Only commercial properties
- [ ] Only residential properties
- [ ] Agricultural properties only
> **Explanation:** Economic obsolescence can impact both residential and commercial properties due to external changes in their environments.
### What is a major sign that a residential neighborhood might be experiencing economic obsolescence?
- [ ] All houses are painted the same color
- [ ] Increasing property taxes
- [x] A major highway expansion leading to increased traffic
- [ ] Neighboring homes built at the same time
> **Explanation:** Increased traffic from major highway expansions can make a residential neighborhood less desirable, indicating economic obsolescence.
### How might rezoning laws cause economic obsolescence for a property?
- [ ] By making the property new again
- [ ] By reducing the property taxes
- [x] By changing the character of the neighborhood and affecting desirability
- [ ] By increasing the home's physical deterioration
> **Explanation:** Rezoning can change the character of the neighborhood, leading to decreased desirability and property values.
### If an expensive private home drops in value due to a nearby industrial plant, this is an example of:
- [x] Economic obsolescence
- [ ] Physical deterioration
- [ ] Functional obsolescence
- [ ] Land obsolescence
> **Explanation:** The home's value loss due to the nearby industrial plant is a classic example of economic obsolescence caused by external factors.
Thank you for exploring the concept of economic obsolescence in real estate and testing your knowledge through our challenging quiz. Continue expanding your real estate understanding for a competitive edge!
