Economic obsolescence refers to a decrease in property value due to external factors beyond the property itself, such as recession, construction of other structures, or natural disasters. It is important to consider these factors when evaluating a property to avoid potential losses.
Economic obsolescence is a word used in appraisal or valuation of property. The term refers to a situation where the value of a property or immovable property decreases due to factors from sources other than the property itself. Such factors are many and could include any negative feature that detracts from a full enjoyment of the home or property.
One of the pitfalls of buying a property based on the merits of the property itself without any consideration of present or probable future external factors is a situation where the value of that property will decline over time, rather than appreciate. For example, John may purchase a home in an upscale neighborhood for a reported amount of money with the intention of selling the home within a few years after the value has appreciated. Assuming there is a recession and a housing market crash, the home’s value could depreciate dramatically, rather than appreciate as John expected. In this case, John will suffer a huge loss due to external circumstances or economic obsolescence beyond his control, which has caused the value of his property to fall.
Another example of how economic obsolescence can be enforced can be seen in a situation where the value of the property is affected by the construction of other structures which may detract from the enjoyment of the property. For example, construction of an airport or railroad tracks will interfere with your enjoyment of the property due to noise from planes or trains. Such modifications are beyond the scope of what the property owner can remedy, leading to economic obsolescence or a reduction in the value of the property.
Nature can also be a source of economic obsolescence as certain natural factors contribute to a property’s falling value. Such natural sources of property depreciation might include a tendency to floods, hurricanes, termites, or other forms of infestation such as mold or an abundance of allergy-inducing pollen. For example, a home’s value will surely be affected by an infestation of particularly hardy termite species that defy any effort to get rid of them. This type of natural economic obsolescence factor must be taken into account during the evaluation process of a potential property, in addition to other more man-made factors in order to limit the instances of losses caused by a reduced property value.
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