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Many homeowners hammered by Hurricane Sandy are still fighting battles with their insurers, the Small Business Association and the Federal Emergency Management Agency over the costs of damage to their homes. Many of those who were insured discovered that their insurance wouldn’t cover the full cost of damage, while others were hit with the cost of new flood compliance ordinances that made recovery even more expensive. Experts say that the result has been a depressed housing market in areas worst hit by the storm, but that the slow sales traffic will pick up after the memory of the storm fades and people are once again entranced with the idea of living on the water, no matter the risk. For more on this continue reading the following article from TheStreet.

Richard Chimienti and his wife grew up by the bay in Long Beach, N.Y. and could not dream of living anywhere else.

In 2007, right at the market peak, the couple, both teachers, bought a house just 200 yards from the water for $520,000. Never having seen serious instances of flooding they did not spend too much time worrying about a serious disaster. Their lender required them to carry flood insurance, which they duly purchased.

When Superstorm Sandy struck in the fall of 2012, their house was inundated with 4 feet of water. Insurance adjusters assessed the damage at $130,000, which Chimienti collected. 

Not long after that, Chimienti received a letter from FEMA(Federal Emergency Management Agency) and the city of Long Beach that essentially told him that his house had suffered so much damage that it had to be either elevated or knocked down and rebuilt in order to be in compliance with the community's floodplain ordinance.

His contractors told him that elevation was not an option and he had no choice but to tear his home down and rebuild. But all he could claim from his insurance was another $30,000 to meet the increased cost of compliance, even though the maximum payable amount is $250,000.

"The house was totaled," says Chimienti. "Why not give me the maximum $250,000 that the insurance covers? I fought with them for months but I didn't win that battle."

With the insurance money barely meeting the cost of rebuilding, Chimienti turned to FEMA for assistance. But the organization directed victims to the Small Business Administration first. The SBA offers disaster victims home loans upto $200,000 for 30 years at interest rates as low as 1.68%.

The SBA determined it would take $380,000 to rebuild the house and offered him a loan of $220,000. Chimienti took the loan, believing he could still qualify for federal grant money, which he could then use to pay off the loan.

But he later found that he had been misled and that the fine print had eluded him. It turns out, qualifying for an SBA loan makes him ineligible for the grant. Now he wishes he had not followed FEMA's directions in applying for the loan.

"What would you rather have, a loan or a grant?" says Chimienti. "I lost my house and now I am stuck with a second mortgage on top of my original $520,000. So my total mortgage went up to $740,000. The new house will probably be worth I don't know maybe $620,000 or $650,000. So I am already belly up on my mortgage."

His monthly mortgage has climbed from $4,000 to $4,800. His flood insurance premium jumped to $2,200 a year from $1700, though once the house is compliant, his premium will drop to $400 a year.

Still, with two kids aged three and four and a third on the way, he and his wife are having to deal with the cost of a higher mortgage than they had planned for.

Storm's Real Legacy

A year after Sandy, victims affected by the storm are waking up to a harsh reality. You have to pay a heavy premium to live on a piece of paradise.

People who love the water and the beach just can't stay away from it. It is why any stigma related to buying homes by the water that develops soon after a big disaster such as Sandy typically fades over time, according to Miller.

Residents still largely see Superstorm Sandy as a once-in-a-100 years event. So they focus on rebuilding and move on. But if there is one takeaway from the recent disaster it is this. The odds of a massive disaster are low, but the damages are too heavy to ignore and the recovery process is a nightmare.

If you purchase flood insurance, your coverage is limited to $250,000. So if your home is worth more, you have to purchase additional insurance from private players, which is more expensive. If you have homeowners insurance, you will have to pay extra to get the right riders to ensure that you are adequately covered. Communities affected by the storms are redoing their building codes, making it possible that you might have to rebuild your home to be compliant.

In some cases, homeowners may see their taxes go up to fund rebuilding efforts.

A new law passed by Congress last year essentially ends subsidies and ensures flood insurance rates more accurately reflect the real risk of flooding. Premiums for businesses, secondary home owners and those whose properties have sustained severe repetitive losses are likely to rise by 25% annually for the next five years in a transition to full market rates. For primary residences, the premiums stay intact but if a current policy lapses or the home is sold, the higher premiums kick in, which means these homes are going to be harder to sell.

There is also the chance that a remapping of flood zones puts your home at a higher risk of flooding, subjecting you to a higher premium.

If you factoring in the cost of protection such events, the cost of homeownership in these regions is a lot more expensive than people estimate.

Eroded Market Landscape

Sales activity has already slowed considerably in areas worst hit by the storm. Median sales price in Rockaway, Queens fell 10.7% in the third quarter to $375,000 from a year earlier, according to the quarterly survey of residential sales by Douglas Elliman.

The number of sales fell 52.7% to 44 in the third quarter of 2013 from 93 a year earlier.

Activity may not stay this depressed for long, according to Jonathan Miller, president and CEO of Miller Samuel, a real estate appraisal and consulting firm and author of the report. The stigma will eventually wear off. But affordability of these homes might decline.

"The byproduct of the storm is there is this additional layer of costs outside of principal and interest that could hold back or temper growth in these areas," says Miller.

Miller sees the impact of the rising cost of homeownership hitting the middle- and lower-income homeowners disproportionately. He expects the decreasing affordability will likely change the residential composition of these neighborhoods, shifting the mix toward higher-priced homes and richer homeowners better able to absorb the rising costs.

And with an acute shortage of affordable homes for sale, there could be more multi-family development along the waterfront to cater to demand, according to Miller.

But for middle-income and lower-income homebuyers, a home by the beach may not be within reach.

This article was republished with permission from TheStreet.