California Real Estate Practice Exam

Which type of depreciation is considered most difficult to eliminate?

1. Economic obsolescence

2. Functional obsolescence

3. Physical depreciation

4. Physical deterioration

The correct answer is: Economic obsolescence

Economic obsolescence is most often considered the type of depreciation that is the most challenging to eliminate because it arises from external factors that affect the property's value rather than from conditions within the property itself. This type of depreciation can stem from changes in the local economy, such as a declining neighborhood, increased crime rates, or the development of a polluting factory nearby. Since these factors are outside the control of the property owner, addressing economic obsolescence usually requires broad interventions or changes in the surrounding environment, which can be difficult or impossible to influence. In contrast, functional obsolescence refers to issues within the property that may lead to a loss of value, such as outdated features or a poor layout. While these can often be remedied through renovations, economic obsolescence lacks such straightforward solutions. Physical depreciation involves the wear and tear of the property due to age and deterioration, while physical deterioration is a component of physical depreciation that refers specifically to the physical condition of the property. Both physical depreciation and physical deterioration can typically be addressed through maintenance and repairs, making them less challenging to overcome compared to the external factors that contribute to economic obsolescence.