I get comments on my blog posts all the time.
The strange world of social media and the internet seem to find a way to bring us together, good and bad.
I am constantly surprised everyday on how my posts can inspire the best and the worst out of people. All I can do is be thankful people are reading and try to respond as professionally as possible.
As the blog has matured, I am happy to report that the comments and responses have gotten more and more positive. Just over the past two weeks is a sampling of readers that made my day:
- Email: “Really good article. Well thought out, well communicated, excellent and balanced recommendations. Just wanted you to know. Thanks.”
- Comment: “The author is a real pro who can find the right property for anybody keeping in mind his/her budget and needs.”
- Comment: “Great article! Thank you as always for the detailed comparisons you provide.”
To these recent responses, thank you! It really means a lot. And thank you to all of the past positive encouragement as well.
As for the mean and negative comments, I’ll take the high road and say nothing!
A Comment and a Response
Recently, I wrote about South Bay pockets outside of my normal blog coverage zone. The post was titled “Great Real Estate Value Just Outside the Beach Cities and Palos Verdes,” which still covered South Bay homes, but obviously per the title, affordable homes at a value.
If you have not read last week’s post, you can read it here. This blog post covered areas like Walteria in Torrance and Westchester in Los Angeles, both being affordable alternatives to expensive beach real estate.
I received a comment (neither good or bad) that was an opinion. Take a look:
- Hate to spoil this article. but the golden rule of real estate is: location, location, and location! If you just start a family, do you want your kids to be in Los Angeles School District? If you want to retire and downsize, do you want to live in a noisy and crowded neighborhoods during g your retirement? Although those listed prices are below 1 million, they are over priced. Is cheaper price give you better value? That’s the same as promoting penny stock because its stock price is cheaper than Apple stock price. You can’t convince people by saying penny stock will give you better investment returns because its stock price is cheaper than Apple stock price. THINK!!!
This is an interesting opinion and one I hear quite often. I would like to thank this reader because I think it is an important topic. It also inspired me to do research and post a full blog on this very notion above.
I wanted to dive into this because too often people will purchase a home based on an opinion of what is perceived to be a “better location.” What many people do not know is that just because it may be perceived as a “better” location, does not mean that “worse” locations will not provide a better return. Additionally, comparing real estate to Apple stock is not uncommon and one I use myself…again, based off an opinion.
This post will take data and numbers to help form, hopefully, the most accurate data-driven opinion on South Bay real estate, its location, and relationship to Apple stock and equities.
Equities and Apple Stock
Before I dive into this post, everything that I will be talking about will be discussed over a 20-year period.
Often, I hear “don’t buy penny stocks, just buy Apple” when comparing equities to real estate and varying locations. Let’s explore this notion.
Apple Stock is up an incredible 7,733% over the past twenty years. It is amazing, but also an anomaly.
The typical investor is going to buy a basket of stocks, mostly “blue chips,” to diversify their portfolio. It is a boring example, but I will take the Dow Jones Industrial 30. Let’s look some of those stocks 20-year returns:
- J&J up 271%
- Home Depot up 388%
- Boeing up 876%
- Caterpillar up 560%
- Disney up 230%
- McDonalds up 462%
- United Technologies up 331%
These are some of the top long-term blue chip performers that most individuals would have purchased with much greater frequency than Apple. And throwing out Apple, these companies produced some pretty incredible returns.
But equally on the other side, there have been some real 20-year duds that people likely purchased as well.
- IBM up 12%
- Intel down 10%
- AT&T flat
- Coca-Cola up 158%
On top of that, there have been some even bigger disappointments with well-known names that were behemoths in their hey-day. Those include:
- Kodak – Bankrupt
- GE – Lost 80% of its value
- GM – Bankrupt during the financial crisis
- Sears – Destroyed by Amazon
- Goodyear Tire down 34%
So, while you may have a once-in-a-lifetime win with Apple, you probably owned a lot of these other names that were the “Apple’s” of their day, in a sense.
How does this compare to say Walteria and Westchester?
Twenty years ago, Walteria median prices were around $385,000 and today, those median prices are around $930,000.
As for Westchester, median prices were around $410,000 twenty years ago and today, they are around $1,267,000.
Check out the percentage returns of those markets over the last twenty years…
- Walteria up 142%
- Westchester up 209%
But, when you think about the fact that the average person puts down only 20% and finances the rest, the leverage amplifies the returns. So, when factoring in a bank loan and the return on a typical down payment…
- Walteria up 708%
- Westchester up 1,045%
Boeing and Apple are the only two examples above that would have outpaced the typical home buyer in these areas and their 20% down payments.
Do you think someone would have had the genius foresight to invest their 20% down payment all into Apple or Boeing? That is highly unlikely.
More than likely, positions were taken in some Boeing, some Apple, some Kodak, some Home Depot, some GM, and some Intel, diversifying their portfolio.
With that mix, Westchester and Walteria returns far outpaced investments in the baskets of investments in these companies.
And to say “just buy Apple” is silly in hindsight.
Many of you know the story of Apple. In 2000, Apple was a computer company (at the time, named Apple Computer) and was getting beat up by incredible companies such as HP, Compaq, and IBM.
Apple did not release their game changing product, the iPod, which revolutionized the music business, until October 2001. The iPhone, which truly brought Apple into its behemoth status, was not even a thought in investors’ minds in 2000.
In theory, Apple was not a penny stock, but it was an extremely risky investment competing against more dominant computer companies. It wasn’t a penny stock, but it was far from a safe bet.
To buy Apple in 2000 without the iPod, iPhone, AppStore + Services, and say you knew the company was a sure bet…it would be far from the truth.
More than likely ANY Walteria or Westchester home beat your basket of stocks or the infinitely small chance that you put a significant portion of your net worth into Apple.
All this leads me to index investing and real estate markets…
Index Investments and Real Estate Markets
Most investors, including Warren Buffet, will tell you that you cannot outperform the market.
So for equities, Buffet will often recommend buying an S&P index fund. I like to think that an index fund for real estate could be Los Angeles County or the South Bay as a whole. But, we will stick with the Walteria and Westchester examples as there are hundreds to thousands of homes in these areas that provide a large-scale “index” of the respective market.
So over twenty years, here is likely what investors earned in equities and real estate:
- Dow Jones up 131%
- S&P up 114%
- Walteria up 142%
- Westchester up 209%
Equity investors will argue that I am not including dividend income which brings the S&P to a long-term average of 7% to 9%.
I would argue that:
- Walteria and Westchester homes could be rented out and provide “dividend income.”
- After a while, the cost of ownership would be cheaper than renting. The value of a roof over one’s head at a discount to others creates a dividend effect in saved payments.
Dividend income makes calculations a lot more complicated for a lowly old Realtor like me so I use that example to throw out dividends…even if I am stretching a bit.
That said, if you assume dividends in the S&P make returns of 7% over twenty years, then you have to assume homeowners purchased with 20% down. Therefore…
- S&P 500 up 300%
- Walteria up 708%
- Westchester up 1,045%
If you believe more than likely people are investing in a long-term basket of stocks and index investing (not just buying Apple only), then the clear winner between equities and South Bay affordable real estate, per the data, is…Walteria and Westchester!
The returns from these home markets are far from penny stocks and potentially a better investment over the long-term than equities.
The best part of it all, you do not have to be a stock picker and hope you land a great investment like Home Depot. You can just trust that you can buy ANY home that is right for you in the basket of homes in Walteria/Westchester, and over the long-term, you are just as big of a winner as any other homeowners in the area.
This all brings me to the last point brought in my readers comment.
Location, Location, Location
Yep, location location, location…you have all heard it.
For this example, let’s take Walteria and Westchester versus the Beach Cities and Palos Verdes.
Manhattan Beach median prices were $760,000 twenty years ago and today, the median price is around $2,375,000.
Palos Verdes Estates median prices were $830,000 twenty years ago and today, the median price is around $1,930,000.
Taking our 20% down model, here are the results:
- Manhattan Beach up 1,062%
- Palos Verdes Estates up 662%
- Westchester up 1,045%
- Walteria up 708%
Wow. Numbers do not lie.
Manhattan Beach has the benefit from West Los Angeles migration and the tech boom. Westchester is a neighboring area that reaps some of those same benefits.
Both grew at the same pace.
Palos Verdes Estates is right next door to Walteria and offers some of the same value propositions as Palos Verdes with location, area, etc.
Both essentially grew at the same pace over a 20-year period as well.
Location, location, location is extremely important in many cases and will give you an edge in a lot of scenarios when selling your home.
But, over the long-term, this data concludes that location, location, location is essentially South Bay, South Bay, South Bay.
Pick anywhere in the South Bay and you will win big.
If you have made it this far, you are amazing and thanks for reading.
I think the data is pretty clear and comes to conclusions on the three points offered by my reader/commentator.
Point #1: Apple, Equities, and Real Estate
It is highly unlikely that someone invested a significant portion of their wealth in Apple twenty years ago with no other stocks.
It is much more likely that someone invested a significant portion of their wealth in a 20% down payment in Walteria or Westchester.
When you take a basket of blue chip stocks, both winners and losers, and any home or basket of homes in Walteria and Westchester, these areas are still a clear winner over equities.
And the real estate could not be father from a penny stock.
Or maybe it is that one penny stock that hit big?
Point #2: Index Funds vs. Real Estate Markets
When you take the more likely scenario of a Dow 30 or S&P 500 index funds, even the best case scenario yields about a 400 to 500% return.
Walteria and Westchester will yield between a 600 to 1000% return.
Again, these areas have proven to be fabulous investments.
Point #3: Location, Location, Location = South Bay
Beach Cities and Palos Verdes real estate is THE location, location, location in terms of the desirability if you are looking at price.
But, when you look at the hard data, Westchester has kept pace with its peer in Manhattan Beach and Walteria has kept up with its peer in Palos Verdes Estates.
The location, location, location does not mean beach real estate. Per the data, location, location, location can mean the South Bay.
To conclude, last week’s blog was to offer insight into the fact that there are affordable areas outside of the Beach Cities and Palos Verdes that offer great value.
We are lucky to live in the South Bay with people of all walks of life. Just because one person thinks Los Angeles Unified is not right for them, does not mean it is not right for another…and it does not impact the value or investment long-term.
Whether you live in Palos Verdes or Walteria, Manhattan Beach or Westchester, owners will earn the same returns equally as each other over the long run.
And I think that is the beautiful thing for the South Bay.