IAAO Fundamentals of Real Property Appraisal (101) Practice Test

Economic obsolescence refers to a reduction in property value that stems from external economic factors, not from the property itself or its physical condition. This type of obsolescence occurs due to circumstances outside the control of the property owner, such as a declining economy, changes in local industry, increased crime rates in the neighborhood, or other factors that negatively impact the desirability of the location.

For example, if a major employer in the area shuts down, this could lead to job losses and a decline in demand for housing in the vicinity, thereby reducing property values. Similarly, deterioration of the neighborhood due to factors like increasing traffic, environmental issues, or poor public services can lead to economic obsolescence. This emphasizes that while the physical attributes of the property may remain unchanged, it is the surrounding external environment that can significantly affect its market value.

The other options refer to different concepts. An increase in property value due to neighborhood improvements pertains to economic appreciation, while a reduction in property value due to internal factors usually relates to physical depreciation or functional obsolescence. The depreciation of physical structures on the property specifically addresses the wear and tear or aging of the buildings themselves, which does not encompass the external economic influences characteristic of economic obsolescence.