Nationwide Mortgage Licensing System (NMLS) Practice Exam

In the context of mortgages, what does 'economic obsolescence' refer to?

1. Loss of property value due to exterior factors

2. Decreased property value due to internal flaws

3. Increased value due to market demand

4. Devaluation from wear and tear

The correct answer is: Loss of property value due to exterior factors

Economic obsolescence refers to the loss of property value that arises from external factors affecting the property. This can include changes in the neighborhood, such as an increase in crime rates, the construction of undesirable facilities nearby, or a downturn in the local economy. These external elements are beyond the control of the property owner and can significantly impact the attractiveness and value of the property. Internal flaws, such as structural issues or outdated designs, would relate more to physical depreciation or functional obsolescence rather than economic obsolescence. Market demand can indeed influence property values, but an increase in value due to high demand does not fit the definition of obsolescence, which specifically involves a reduction in value. Devaluation from wear and tear is closely related to the physical condition of the property itself and does not involve external economic factors. Thus, the correct understanding of economic obsolescence highlights the impact of external conditions on property value.