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Economic obsolescence is a form of depreciation caused by factors that are not on the property, in the property, or even within the property lines. It can be caused by factors like the neighborhood experiencing a rise in crime. It can also be caused by economic factors such as problems in the job market. A recession or economic depression that reduces property value can also be categorized as economic obsolescence.
Examples of causes of economic obsolescence can include:
- Flight patterns changing to go over your house
- Too many similar purpose buildings in the area
- A highway being constructed nearby
Functional obsolescence and economic obsolescence can be difficult to differentiate at times. For example, when consumer tastes or desires change, older properties can lose some of their desirability. This happened when builders starting putting master bedrooms in homes. The older homes with no master bedrooms lost some of their appeal or desirability. This lack of a master bedroom was earlier cited as an example of functional obsolescence. It could perhaps be argued that it actually was the desirability of other properties that caused the loss in value, and this was outside the property lines of the property in question, so that this should be considered economic obsolescence. In the final analysis, it probably makes no real difference whether a specific factor is considered functional or economic obsolescence, as long as it is not considered (and deductions made) twice.
Economic obsolescence is almost never curable, at least not at any reasonable cost a single property owner could be expected to pay. For example, if there is crime in the neighborhood or the entire area is falling apart, no single property owner can be asked to pay to fix the neighborhood. Even if an owner had that kind of money, it would not add enough value to that owner's property, so it would not be considered economically feasible and they would be much more likely to simply move.
Examples of causes of economic obsolescence can include:
- Flight patterns changing to go over your house
- Too many similar purpose buildings in the area
- A highway being constructed nearby
Functional obsolescence and economic obsolescence can be difficult to differentiate at times. For example, when consumer tastes or desires change, older properties can lose some of their desirability. This happened when builders starting putting master bedrooms in homes. The older homes with no master bedrooms lost some of their appeal or desirability. This lack of a master bedroom was earlier cited as an example of functional obsolescence. It could perhaps be argued that it actually was the desirability of other properties that caused the loss in value, and this was outside the property lines of the property in question, so that this should be considered economic obsolescence. In the final analysis, it probably makes no real difference whether a specific factor is considered functional or economic obsolescence, as long as it is not considered (and deductions made) twice.
Economic obsolescence is almost never curable, at least not at any reasonable cost a single property owner could be expected to pay. For example, if there is crime in the neighborhood or the entire area is falling apart, no single property owner can be asked to pay to fix the neighborhood. Even if an owner had that kind of money, it would not add enough value to that owner's property, so it would not be considered economically feasible and they would be much more likely to simply move.