Economic obsolescence
Economic obsolescence is value lost because of something outside the property. The building is fine, the design is fine, and the value has fallen anyway.
It is also called external obsolescence, which is the more descriptive name.
What causes it#
Proximity. A highway or rail line built alongside. An industrial use, a landfill, a facility with noise, odour or traffic.
Local economic decline. A major employer closing in a town built around it. Minnesota has clear examples in mining and manufacturing communities where housing values track a single industry.
Neighbourhood change. School district decline, rising crime, loss of retail and services.
Concentrated distress. A block with several vacant, boarded or foreclosed properties. Each one reduces the value of every house around it, and those distressed sales enter the comparable set that values the rest.
It is incurable#
The defining feature.
An owner can repair deterioration and can sometimes cure functional obsolescence. They cannot move the highway, reopen the plant, or occupy the vacant houses on their street.
No amount of investment in the building addresses a cause that is not on the property. That is why the discount persists through a renovation.
The contagion problem#
Worth stating plainly because it is the mechanism by which one household's difficulty becomes a neighbourhood's.
A foreclosure produces a vacant property. The vacant property deteriorates and sells at a discount. That sale becomes a comparable. The comparable lowers the valuation of every neighbouring house — including houses whose owners are current on everything and maintaining their homes properly.
Lower valuations mean less equity, which means less capacity to refinance, sell or borrow against the property when trouble arrives. Which raises the probability of the next distressed sale.
That loop is the reason distress clusters spatially rather than distributing evenly, and it is why measuring concentration matters as much as counting events.
For assessment purposes#
Economic obsolescence should be reflected in assessed values, because it affects market value and comparable sales in the area capture it.
Where an assessment has not caught up with a change — a plant closure, a new road, a rapid increase in vacancy — that is a legitimate ground for appeal, and the evidence is recent sales in the affected area.
For an investor#
It is the factor most often underweighted.
A property bought cheaply in an area with genuine economic obsolescence is not underpriced. It is priced correctly for a location whose problems the buyer cannot fix, and the after-repair value will reflect the area rather than the renovation.