Economic Obsolescence

Definition

Economic obsolescence refers to a reduction in the value of a property due to external factors that are not related to the property's physical condition or use. This can include changes in the local economy, such as increased crime rates, declining industries, or the construction of undesirable neighboring properties. Economic obsolescence is important in understanding how external influences can impact property values and plays a significant role in the cost approach to valuation.

5 Must Know Facts For Your Next Test

1. Economic obsolescence is often considered incurable, as it stems from factors outside the control of property owners.
2. Common examples include neighborhood decline, zoning changes, or the introduction of new infrastructure that negatively affects property appeal.
3. It is distinct from functional obsolescence, which relates to issues within the property itself.
4. In the cost approach to valuation, economic obsolescence is factored into determining the overall depreciation of a property.
5. Appraisers often analyze local market conditions and trends to assess the impact of economic obsolescence on property values.

Review Questions

• How does economic obsolescence differ from functional obsolescence in terms of their impact on property valuation?
  • Economic obsolescence differs from functional obsolescence in that it is caused by external factors affecting the property's value rather than internal deficiencies. Functional obsolescence refers to issues like outdated layouts or poor design that make a property less appealing. In contrast, economic obsolescence arises from broader economic conditions such as neighborhood decline or changes in demand for certain locations. Understanding both types of obsolescence is crucial for accurately assessing property value.
• What role does economic obsolescence play in the cost approach to valuation when estimating property worth?
  • In the cost approach to valuation, economic obsolescence is an essential factor because it impacts how appraisers calculate depreciation. When valuing a property, appraisers consider the replacement cost and subtract depreciation, which includes both physical deterioration and economic obsolescence. By incorporating economic obsolescence, appraisers provide a more accurate estimate of a property's market value by reflecting current external economic influences that diminish desirability and marketability.
• Evaluate how changes in local economy and community infrastructure might lead to economic obsolescence and its potential long-term effects on real estate values.
  • Changes in the local economy, such as job losses or business closures, can trigger economic obsolescence by reducing demand for nearby properties. Similarly, negative shifts in community infrastructure—like increased traffic congestion or the construction of undesirable facilities—can deter potential buyers or renters. Over time, these factors may lead to a decline in overall real estate values within the area, creating a cycle where properties become less attractive, further reducing demand and leading to even greater economic obsolescence. This long-term effect can significantly impact investment decisions and community planning.

Related terms

Functional Obsolescence: A decrease in property value resulting from outdated features or design flaws that make a property less desirable compared to modern standards.

Externalities: The unintended consequences of an action affecting third parties, which can lead to either positive or negative impacts on property values.

Cost Approach: A method of property valuation that estimates the cost to replace or reproduce a property minus depreciation, including economic obsolescence.