Thomas J. Duffy, a fee-only advisor in Red Bank, N.J., worries that one of his clients is going to pull money from her portfolio. Her home—25 yards from a lagoon—was destroyed by October’s “Superstorm” Sandy. She was shopping for another house far away from the water and would likely need to liquidate her investments to buy it.

“I haven’t heard from her yet,” Duffy says.

Still, there’s nothing like a devastating hurricane to reverse the attraction of waterfront real estate—long hailed as the most valuable type of investment property.

It’s not yet clear whether the values of waterfront properties in New Jersey, New York and other states affected by the storm will suffer permanent damage amid predictions of more violent storms. In fact, if other coastal regions ravaged by storms in the past are any indication, the areas impacted by Sandy should rebound. But it might take time, and the storm could still lead to higher property carrying costs. Insurance may become more expensive and hard to get. Homeowners might also have to face down higher maintenance costs, construction costs and property taxes.

The National Association of Realtors reports temporary disruptions in property closings after weather disasters. Storms sometimes cause a dip in monthly regional sales, but property generally bounces back a month or two later without seeing a drop in underlying demand. Sales in heavily hit Sandy regions were down 5% in November, says the association, but the surrounding region saw prices up about 7%.

Like Hurricane Katrina, Hurricane Sandy was followed by a surge in sales in those areas that survived serious damage, since people who lost homes in the storm’s path had to relocate. Even as the storm hit, the real estate market was thriving for other reasons, including job growth that was fueling trends nationwide, according to the National Association of Realtors’ third-quarter 2012 survey results. Those thriving areas include coastal areas.

Duffy’s own house is in Oceanport, N.J., just three miles inland, and was among the handful on his block still livable after the storm. After the storm, he received a letter from his tax assessor’s office saying that the values of homes in devastated areas could be reassessed for property tax purposes before the beginning of 2013. “The letter indicated they will make allowances, but once the house is repaired, the assessment will go up to fair value,” he says.

The rash of major Florida hurricanes in 2004 and 2005 did not exactly scare coastal homeowners away. “Waterfront sales are running strong,” says Jack McCabe, a real estate analyst in Deerfield Beach, Fla. “There were selling price increases of 10% or more this year.”

Though Florida prices started to slide in mid-2006, remaining depressed until mid-2011, foreign buyers have flocked into the market paying cash, McCabe says. “They have a strong appetite for waterfront properties. Some even rival some of the 2006 prices.”

Around 2005, he thought about forming a vulture fund to buy up what he thought would be a wave of depressed, foreclosed properties. But those plans never materialized because foreign buyers were still willing to pay a premium for coastal property.

“In 2007 and 2008, prices came down and bulk deals started happening,” McCabe reflects. “These guys [foreign investors] are willing to overpay. That’s the problem. If you’re a smart investor and looking for a low price so as to make a profit and obtain a monthly cash return on your investment, these guys are ruining everything! They’re willing to pay prices that don’t make sense.”

McCabe says affluent foreigners have no problem waiting five to seven years for a positive return. In the meantime, at least, they’re able to get their money out of less economically stable countries. In the South Florida area, buyers are flocking from South American countries, like Argentina and Colombia. In Orlando, he is seeing German buyers, people fearful of investing in their own country because of the euro crisis.

The foreign buying frenzy is further fueled, McCabe notes, by the U.S. Citizenship and Immigration Services’ “EB-5” program, designed to create U.S. jobs. The program expedites the issuance of green cards for foreigners who invest at least $500,000 in designated high unemployment enterprise areas. New York has that designation, he notes, and Miami is also reportedly seeking it.

Well-heeled Floridians are maneuvering to the best of their ability after suffering through multiple hurricanes in the past decade. “Nobody’s done anything differently,” says Benjamin A. Tobias, a Plantation, Fla., financial planner who lives in a condo 19 floors up from a beach in Hollywood, Fla. In 2005, his area was hit hard by Hurricane Wilma.

Obtaining windstorm insurance to cover hurricanes has become a serious issue for clients, he says, but not necessarily enough of a problem to dissuade them from owning on the waterfront.

Florida’s state windstorm insurer of last resort, Citizens Property Insurance Corp., in February 2012 stopped insuring any dwelling statewide with a replacement cost of more than $1 million.

Meanwhile, people with homes valued at more than $750,000 in “wind-borne debris regions,” must have all their home openings protected and meet specific verified standards to obtain windstorm coverage. The debris regions include Florida’s coastal areas.

“In a number of cases, people who have sufficient wealth are self-insuring,” Tobias says. “The rates are so absurdly high.” Another storm could force them to take cash from their portfolios to rebuild.

Tobias says property owners in condo associations or homeowner associations need two levels of windstorm coverage. They must buy a windstorm policy for the contents of their unit, like furniture. But the primary insurance cost is covered in monthly association dues, often representing the association’s largest line item.

People with mansions or single-family homes in waterfront communities, such as the exclusive Golden Beach, Tobias says, pay the whole cost of insuring, and face $40,000 to $50,000 in insurance bills per year. Considering the chances of a devastating event hitting one particular area, it doesn’t seem to pay.

Brad Fortier, a financial planner in New Orleans, doesn’t see affluent clients giving up the ship on coastal properties. Some of his clients once had vacation homes in Florida, but instead of giving up real estate, they are relocating those houses closer to New Orleans. They are buying vacation property in, say, quaint Mississippi beach towns, close enough that they can get home quickly if there’s trouble and board up their primary residences in the Big Easy. The move also saves gas and time.

Today, Fortier clients put their money into fortifying home foundations and walls instead of cosmetics, like kitchen remodels. As long as insurance remains a viable option, he anticipates they’ll continue to have homes in New Orleans and nearby vacation homes.

He acknowledges that some clients have been selling properties, but only because they already own so much real estate. Others, however, are trying to take advantage of the low interest rate environment and mortgage tax deductions, and so might be more apt to buy a vacation home. Frequently, his clients have a New Orleans home, a vacation home on the Mississippi coast, as well as a modest “fishing camp to get away from their wives,” he says. The primary home and vacation home are built very elaborately out of cinder block. They are designed to simply be washed down after a storm. The fishing enclaves are modular homes that can be purchased for $80 per square foot out of a catalog and hooked up to plumbing. If it blows away, another can simply be ordered. Since Katrina, “a lot of clients rebuilt all three,” Fortier says.

The West Coast
Homeowners in California deal with different types of disasters than people back east, namely earthquakes. But most of those are inland, says Michael Nozzarella, a CFP licensee at Tarbox Group in Newport Beach, Calif. His own upscale coastal town has experienced no decline in real estate demand, but instead rising foreign demand for a dwindling supply of coastal property. It’s often from Japanese and Chinese buyers. “We’re very detached from what is going on in the East Coast,” Nozzarella says.

Californians, however, have become concerned about tsunamis, ever since the one that devastated Japan in 2011. That catastrophe, along with talk of rising sea levels, has triggered discussions at Nozzarella’s firm.

Though prices don’t reflect it, there are reasons to be afraid. Many of Nozzarella’s clients have all their assets tied up in their homes, which they aim to pass down for generations, he says. “We run into clients with $10 million to $30 million in net worth, but it’s all in real estate.”

Yet fear of a natural disaster isn’t deterring homeowners. Nozzarella’s clients are generally not changing their financial strategies or diversifying out of real estate because of tsunamis and rising sea levels.

“In California, property means more than in lots of other parts of the country,” he says. “You just don’t think it’s going to happen to you. There has been no slowdown with regard to building permits.” The state’s coastal commission, he notes, is making new home builders properly anchor homes.

New York CFP Lewis J. Altfest had a client whose house was in the Breezy Point area of Queens was just washed away. “That person is rebuilding,” he says.

Altfest says that in the aftermath of Sandy, “decision-makers are nervous, and I would say, one more flood away from changing their point of view about waterfront property.” Instead, buyers are pressuring sellers to lower prices. “They feel that something has happened, and they’re still interested and want to get it more cheaply.”

Everyone is nervous these days, Altfest says. “But it would take a second [storm] to have a real change. Insurance rates are going to go up shortly. People are prepared to pay for it.”

Altfest’s advice: If you’re going to live on the water, find a way to construct something to protect yourself or don’t purchase the property.

“But people aren’t listening.”