National Valuation Practice Exam 2025 - Free Valuation Practice Questions and Study Guide

Economic obsolescence refers to a reduction in property value due to external factors that affect the desirability or functionality of the property, which are typically beyond the owner’s control. The example given, a house abutting a closed factory, is a clear illustration of this concept.

When a factory closes, it can lead to negative perceptions of the neighborhood, potential for increased crime, reduced economic activity, and a general decline in the area's livability. As a result, properties nearby may suffer a decrease in value because of these external factors, which are not related to the condition or features of the property itself but rather to the surrounding environment.

In contrast, the other options describe issues that are more aligned with physical depreciation or functional obsolescence rather than economic obsolescence. For instance, having four bedrooms and only one bathroom might affect the functionality of the house, but it doesn't relate to external economic factors. Similarly, a lack of insulation in an apartment or lack of paint on a barn pertains to the structure's condition and upkeep. These are examples of necessary improvements that can be addressed by the property owner, unlike the situation with the closed factory, which is an external issue affecting property value.