What Is Economic Obsolescence?

Esther Ejim
Esther Ejim
Home depreciation may occur if surrounding homes in a neighborhood are sold for less money than purchase price.
Home depreciation may occur if surrounding homes in a neighborhood are sold for less money than purchase price.

Economic obsolescence is a word used in property valuation or appraisal. The term signifies a situation where the value of a piece of property or real estate drops due to factors emanating from sources other than the property itself. Such factors are many and could include just about any negative feature that detracts from a complete enjoyment of the house or property.

Allergy-inducing pollen may be considered a natural source of property depreciation.
Allergy-inducing pollen may be considered a natural source of property depreciation.

One of the pitfalls of purchasing a property based on the merits of the property itself without any considerations of present or likely future external factors is a situation where the value of such a property will decline in time, instead of appreciating. For instance, John may buy a house in an exclusive neighborhood for a stated sum of money with the intention of selling the house in a few years after the value has appreciated. Assuming there is a recession and an attendant bust in the housing market, the value of the house may depreciate drastically, rather than appreciating as John had expected. In this instance, John will suffer a huge loss due to external circumstances or economic obsolescence beyond his control, which caused the value of his property to drop.

Another example of how economic obsolescence may apply can be seen in a situation where the value of property is affected by the construction of other structures that may detract from the enjoyment of the property. For instance, the construction of an airport or railway tracks will interfere with the enjoyment of the property due to the noise from the planes or trains. Such changes are beyond the scope of what the owner of the property 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 some natural factors contribute to the fall in the worth of a piece of property. Such natural sources of property depreciation could include a tendency to flood, hurricanes, termites or other forms of infestation like mold or an abundance of allergy-inducing pollen. For example, the value of a house will definitely be affected by an infestation of a particularly hardy species of termites that defy every effort to get rid of them. This type of natural economic obsolescence factor must be considered during the appraisal process of a potential property, in addition to the other more man-made factors in order to limit instances of losses caused by reduced property value.

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Discussion Comments

Markerrag

@Terrificli -- The property values in a neighborhood don't necessarily drop because of rent homes. if the rent homes attract undesirables, though, that will cause property values to drop.

For example, there was a very nice home in my parents' neighborhood that was turned into a rental property. Values were fine until a family of hooligans moved in and the police became regular visitors to that house.

The lesson here is simple enough. People can impact property values as much as anything else.

Terrificli

We see this happen a lot in neighborhoods where single family homes are suddenly turned into rental properties. As unfair as it may seem, the existence of rental houses will almost always drag down property values in a neighborhood.

You usually see this in older, established neighborhoods where older homes are snatched up by investors, fixed up and rented. Older homes can usually be bought for a decent price and that is particularly true if they need a little work. That is why investors tend to jump on them.

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    • Home depreciation may occur if surrounding homes in a neighborhood are sold for less money than purchase price.
      By: EyeMark
      Home depreciation may occur if surrounding homes in a neighborhood are sold for less money than purchase price.
    • Allergy-inducing pollen may be considered a natural source of property depreciation.
      By: jovanmandic
      Allergy-inducing pollen may be considered a natural source of property depreciation.