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Sandy's Lasting Impact: Booming House Prices

31 October 2013 in Trading Ideas

It’s hard to believe, but this past Tuesday marked the one-year anniversary of Hurricane Sandy hitting the Jersey Shore.

In the end, 24 states were affected, with the most severe damage hitting both New York and New Jersey, the latter of which suffered an estimated $38 billion in damages alone – more than half the estimated total storm damage of $68 billion.

After the storm, it was reasonable to expect that massive recovery and rebuilding projects would take place. That was the thesis behind our Rebuilding After Sandy motif, a portfolio of stocks of companies in sectors such as building supplies and utility repairs that could may have had the potential to benefit from such intensive demand.

In 2013, in fact, the motif has gained 24.7%. During that same timeframe, the S&P 500 has increased 22.2%.

In the past month, the Rebuilding After Sandy motif is up 4.2%; the S&P 500 has risen 3.8% over that same period.

However, what has been a little more unexpected is that Sandy’s aftermath, particularly on the Jersey Shore, has been to effectively accelerate a trend that real-estate industry analysts have already been noticing in many waterfront communities across the US: The rising cost of housing, insurance and taxes has turned many vacation spots into havens that only the wealthy can afford.1

As the Wall Street Journal explained in a recent article, after the storm’s damage, many less-affluent homeowners find that the cost of repair doesn’t make financial sense, and, as a result, they find selling their homes the only viable option.

In turn, wealthy buyers are able to pounce on distressed prices, and effectively transform more modest properties into more valuable assets, building higher-priced homes to replace the more mid-level bungalows.

This isn’t a unique phenomenon — After Hurricane Andrew hit Florida in 1992, a Federal Housing Finance Agency study showed values dramatically increased for the hardest-hit areas before eventually settling back to pre-storm rates of increase.

And, as the Journal notes, not all of the fallout from the housing boom is necessarily a plus, starting with the change in the social fabric as new affluent buyers replace middle-class homeowners whose families have inhabited the area for generations.

However, while some think many of the coastal towns are going to benefit from the additional tax revenue and spending of wealthier-beachgoers, others see small businesses suffering because the change means fewer homes with fewer residents. “If you don’t have these secondary residents back,” Paul Jeffrey, president of the nonprofit Ortley Beach Voters and Taxpayers Association, told the Journal, “the pizza shops and the hardware stores that depend on them don’t make it.”

Despite that potential struggle, what does seem more certain, at least for the near term, is that companies and stocks that could benefit from a sustained housing upswing on the East Coast will continue to be on investors’ radars.

1Josh Dawsey, “Sandy’s Legacy: Higher Home Prices,” WSJ.com, Oct. 27, 2013.