What type of obsolescence involves a reduction in value due to external factors?

The correct type of obsolescence that involves a reduction in value due to external factors is economic, also known as external obsolescence. This refers to a decrease in property value caused by factors outside the property itself, such as economic downturns, changes in neighborhood conditions, or the development of undesirable amenities nearby (like a landfill or noisy interstate).

For example, if a community experiences a decline in economic activity and businesses begin to shut down, the value of properties in that area may decrease due to the negative perception and reduced demand. Unlike functional obsolescence, which relates to issues that stem from the property itself (like outdated designs or poor layout), and physical obsolescence, which refers to wear and tear or physical deterioration of the property indicating aging, economic obsolescence is distinctly tied to external, environmental, or economic factors affecting the property's overall worth.

This distinction emphasizes the importance of understanding how broader economic conditions can impact property value outside of its physical characteristics or functional usage.