Whidbey Island INVESTOR

UNCORKED: THE ECONOMICS OF WINE. Wine is a gigantic business world-wide, approaching $180 bil. just in the value of wines bottled each year. In the U.S alone, wine is a $12.3 bil. retail enterprise, not counting another $4.1 bil. in imports from other nations. The U.S. exported $550 mil. worth of wines to the world in 2005. In America wine has risen from a very modest and insignificant commodity from the 1960's on and is now growing at more than 4% per year - perhaps now the largest single agricultural product in the U.S. Wine mirrors world trade. As world trade has increased in the last three decades from $200 bil. to $7 tril., so world wine trade has ballooned. As the world grows wealthier, it will first better feed itself and secondly integrate more wine into its food culture. Growing sophistication in food will be accompanied by more "conspicuous" wine consumption. It is not unreasonable to imagine that in a few decades, wine production and sales could become the most valuable of all the world's single agricultural products; perhaps to equal twenty percent of food costs. This brief article explores the place of wine in the culture of food and the burgeoning economic role of wine in international commerce, but focusing primarily on the future of U.S. wines and the wine business.

The Roots of Wine. The making of wine is among the world's oldest crafts, appearing about 6,500 years ago[1]. Early wines came from Greece, Egypt and adjacent areas of the Near East, as well as the Roman Empire, and was a major trade item from the first-century on. Wine for the first time in human history rendered "water" safe to drink. Grape-growing, some portion of which must have been fermented into wine, probably began in Mesopotamia at least 6,000 years ago. Egyptians and others of the Middle East, Greeks and those living in the Mediterranean Basin soon caught on to the glories of wine. From 1,600 B.C. grape wines spread rapidly to all the regions of Greek influence, including other areas of Europe.

Wine-making as an art form was perfected by the Romans. Under Roman influence, wine consumption increased enormously, in fact, wine became a form of money in foreign trade. Roman inventiveness probably developed all the tools of modern wine-making; the wooden barrel, the glass bottle and that practical "corkage" that inhibited oxidation - a process that turns wine into vinegar. From the 1st-century, Italy became a great wine factory. From hundreds of locations wines were exported to the known world, from Eastern Europe to the Caucasus - to Spain, Portugal, France, Germany and England. Countries without vineyards, Ireland, Holland and Scandinavia, also imported Mediterranean wines. With local adaptations and experimentation, vineyards were developed in France, Spain Portugal and Hungary. Because of even better microclimates, by the 10th-century, France rose to dominance in the production and export of wine. The five magnificent and unique growth areas of France[2], Burgundy, Bordeaux, Champagne and the Rhone and Loire Valley's still produce some of the world's most distinguished wines. During the Age of Exploration that included the conquest of Mexico and South America by both Spain and Portugal and parallel colonization by the Dutch in South Africa, wine grapes came to be introduced to southern Africa, as well as Mexico, California, New Mexico, Texas, Chile, Argentina and other areas of the New World. During the 17th-century, wines met "competition" as other "safe water" appeared with large batch beer and distilled spirits, as well as coffee and tea. Vines were introduced into Australia in the late 18th-century and after 200 years have developed a character of their own. Wine grapes were introduced into California early in the 19th-century. Contrary to popular opinion, the Napa Valley did not pioneer early California wine production. In fact, the Sonoma Valley has a history of wine production that precedes Napa by almost a half-century. The Russian colony at Ft. Ross were producing quantity wine by 1812 and from 1824 on, Frere Jose Altimira, who built Mission Sonoma, might be recognized as the "father of California wines." The cultivation of wine grapes and the production of wine is on a "tear" worldwide. Eastern Europe, from Hungary to Georgia is raising the quality and quantity of their wines. In the New World, Argentina, Brazil and Uruguay have joined Chile as expanding producers of wine. Australia and now New Zealand have also developed large wine industries. China has become the fifth largest grower of wine grapes. It is the United States in the last 15 years, however, that has had such a dramatic impact on the world's wine industry.

What is Wine? Wine is rooted in the cultivation of grapes and some other fruits. The growing of grapes specifically for wine production, viniculture - while the specific chemistry of wine is called oenology[3]. Wine results from the fermentation of sugar into alcohol (ethanol) stabilized by tartaric acid[4]. All primates, man included (and most birds), are by nature drawn to the aroma of ethanol, the natural alcohol from, especially, fermented fruits[5]. We can only speculate on the earliest relationship of "man to wine." In the intervening millennia, three types of wine have been developed, red, white and rose, and each of these may be "dry", "medium," or "sweet." There are further two kinds of natural wine: still wine and sparkling wine (a third, "fortified wine" is made by injecting distilled alcohol to attain unnaturally high alcohol levels). As a general rule, red wines are made from red grapes and white wines are made from white grapes. Exceptions exist. Some white wines are made from red grapes, where the coloring agents in wine skin are removed to retain "whiteness." Both kinds of natural wines are made in the same general manner, except that sparkling wines undergo a "secondary fermentation" (called the malalactic fermentation) that creates carbon dioxide gas under pressure. Natural wines contain from 8-16% alcohol by volume, depending on the style of wine being created. The "quality" of a wine is unrelated to its alcohol content, however, as a rule white and sparkling wines tend toward lower alcohol content. Another prevalent myth is that "sweet" natural wines are of lower quality. Quite to the contrary, some of the world's most distinguished and expensive white wines are made from Reisling grapes, grown along the hillsides overlooking the Rhine Valley, in Germany[6]. Wine and its consumption is sometimes accompanied by elaborate rituals, many evolving from the late Middle Ages. In truth, wine may be enjoyed in utter simplicity rather than draped in rituals of acquisition, storage, tasting and consumption. It is true that traditionally wine consumption and the culture and conviviality surrounding wine and food, stimulate the artistic senses of sight, smell, taste, touch and sound. Clearly, this contributes to the enjoyment of wine beyond its alcohol content. In our modern, fast-paced world, wine will increasingly be cited, not alone for stimulating conviviality, but for the contribution of micronutrients wine may contribute to human health[7]

The barriers to increased wine consumption in the U.S. remain first and foremost that about a quarter of all wine consumers are intimidated, literally overwhelmed, by wine culture. For wine and its "culture" to move toward the next stage of acceptance, wine must be demystified - it must become again a simple food; accessible to all, in an environment that does not intimidate. According to a recent survey, 23% of wine consumers in the U.S. describe themselves as "Overwhelmed"[8]. The Overwhelmed are joined by five other self-described consumers. "Enthusiasts" are those passionate about wines and inclined to be quite experimental. They are also willing to try the most expensive vintages; many no bargain at all. "Image Seekers" are wine drinkers with a tendency to admire overpriced wines; prey of the wine marketing racketeers, those who formerly sold Swiss watches! Image-Seekers willingly perpetuate many of wine's legacies of myth. Then there are the "Traditionalists," the most focused of wine consumers. They tend to favor well-known labels, well-known vineyards, and particular grapes or varietals. "Savvy-Sippers" are the "gyroscopes" of wine consumption, helping to keep the rest of us balanced. You know who they are, you find them at every major new shipment to Trader Joe's. Their Internet connectedness enables them to cause a run in one day, on all 2000 cases of any good wine meeting their strict "value" criterion. Our last class of consumer has been called, the "Easily Satisfied Imbiber." They tend first and foremost to be price sensitive. They are the reason that Franzia in a box is the world's largest selling wine brand! It is not that Easily Satisfied Imbiber's are necessarily undemanding, many practice strict wine style or brand loyalty. It is rather that they emulate those to whom food is just fuel; where "good" does not have to be very good. It is the Baby-Boomers (those born between 1946 and 1964), America's most conspicuous consumers who have aggressively entered the marketplace for "class, style and elegance;" why wine appreciation in the U.S. has grown exponentially. Wine better matches and complements food than either beer or spirits. Wine production and consumption patterns parallel the world-wide growth in food sophistication, increases in international trade and increased world wealth. Wine has become and is likely to become even more so, another convivial food, perhaps explaining the dramatic drop in per capita spirits consumption and significant decline in per capita beer consumption, worldwide. As the 20th-century closed, the world's most honored wines came from France, Germany, California - and increasingly the Pacific Northwest - Washington and Oregon[9]. Europe, however, remains the "giant." Europe collectively produces 59.7% of the world's wines, a percentage that had declined somewhat each of the past several years. In contrast the U.S. produced 11.1% of the world's wines, but this figure had risen every year for the past 30 years. The growth of viniculture, winemaking and wine consumption continue to closely track the rising influence of Western civilization.

Wine in the 21st-Century. Wine has becomes such a huge world-wide industry, that wine grapes, wine production and wine consumption have become a major factor in agriculture. Data on world wine ("guess-estimates," actually) suggest world production as exceeding 7.1 bil. gallons; 35.8 bil. bottles[10]. It takes little imagination to calculate a retail value for the industry by imputing a conservative $5 to a hypothetical bottle. Currently the U.S. produces about 16% of the world's wine, and arguably about 20% of the world's highest quality wine - much of this exported. The largest domestic producer states are California, Washington and New York. Both California and Washington have wine industries that will ensure the future prominence of American wines. By 2008 it is estimated that the U.S. will consume 25% of the world's wine, up from 19% in 2004 (Wine Institute, April, 2001).

As the 21st-century opens, America has become the boldest adventurer in both foods and wines. Higher quality foodstuffs are available now in the U.S., across the board, than anywhere else. As foods lead, wines follow, eventually to become so intertwined that wine will become again another food. During 2005 the U.S. exported $800 mil. worth of wine, while importing $5.8 bil. The dramatic imbalance between imports and exports should keep American winemakers busy through this century. By 2099 it is probable that Washington State wine grapes will dominate U.S. production, eclipsing California by mid-century and leaving New York a very distant third. There is almost no limit to the acreages in Washington suitable for viniculture. Climate, soils, temperatures, humidity, growth days, terrain, hillsides, eroded scarps and inexpensive, suitable agricultural land provide excellent conditions for wine grapes[11].

Today the U.S. produces over 600 mil. gallons of wine, most of which is consumed internally, plus we import another 158 mil gallons, most of this from France. By the end of this century the U.S. will probably become the world's largest wine producer, followed by France, Italy and Spain, with China, Australia and Argentina vying for fifth place. The world's great traditional producers, France, Italy and Spain, will with time, continue to lose their historic place. The reasons are not xenophobic and the evidence is clear. Firstly, wine-making simply stated is chemistry. American ingenuity has come to the forefront of wine-making and this creative energy will be difficult for other nations to emulate[12]. In the second place, Europe as a region has, in the guise of the European Union, created for itself both excessive competition (through subsidies and inefficient agricultural practices) and mind-numbing internal regulation. The final toll will be felt as the rising cost of viniculture land succumbs to the pressures of development[13]. Attempts to stem this inevitability by additional "rule-making" cannot succeed. The U.S. produces 3.2 mil. tons of wine grapes and capacity increases five percent, per year (2005); a crop value of $23.2 bil. The value of our wine grape production has doubled in the past ten years. In 2005, we produced 623 mil. gallons domestically, and consumed at total of 668 mil. gallons, the net of exports minus imports. We exported from the U.S. 119 mil. gallons with a value of $794 mil. Last year California shipped 522 mil. gallons to consumers worldwide. The California wine business alone had an economic impact in California for 2005 of $45.4 bil. The U.S. is now the world's third largest consumer of wines, after France and Italy; and the fourth largest producer of wines, after France, Italy and Spain. U.S. wine consumption rises about 4% per year such that in 2005, we consumed 285 million cases (677 mil. gallons); a case of wine per man, woman and child in America. By 2015, wines sales will rise to an estimated 325 million cases (773 mil. gallons) and by 2030 to 425 million cases (just over 1 bil. gallons).

As wine becomes more "democratically" appreciated and consumed, many of the artificial barriers of wine snobbery will fall. Even in wine, the invisible hand of the marketplace rules. Where particular wines become well known and respected, there is the inevitable temptation to create "value" by marketing them at astronomical prices. In this sense wines are similar to perfume; the costs of production are small, but marketing to secure sales often consumes ten times the cost of production; even more. A case in point; currently the world's most costly wines come from Bordeaux. A combination of French marketing skill has gotten wholesale prices of premium Bordeaux above two hundred dollars a bottle. With a dozen of the world's nation's now producing some premium wines and this competition increased by a not insignificant "boycott" of French products over the past three years, along with a huge 2004 grape crop finds Bordeaux in crisis. Sales of their wines have declined 1.3 mil. cases between 1999 and 2003. Bordeaux has lost 4,000 vineyards in the past four years; down to about 10,000 as we write (Wine Spectator 11/30/05).

Wine, like all art and craft forms follow money. The consumption of quality wines closely mimic America's growing food sophistication. In only a few years (perhaps, 2008-2010) the U.S. will consume 25% of the world's "best" wine. American ingenuity and our stunning educational programs in viniculture and enology have brought us into the forefront of world-class winemaking, after 200 years of experimentation. The Baroness Philippine de Rothschild famously reminded us that "making wine is a simple business. Only the first 200 years are difficult."

[1] We can be certain, on archaeological evidence that other "fermented crops", such as grains and honey are older technologies than wines made from grapes, even though grape vines in fossilized form that are 60,000 years old have been found.

[2] In this review, I'm excluding two little-known areas, The Languedoc and Provence; "official" areas in France's arcane and cumbersome system of agriculture and viticulture.

[3] Viticulture is the science of cultivating grapes for wine, while oenology is the science of wines and wine chemistry. Today the term "viniculture" is replacing "viticulture."

[4] Tartaric acid is the dominate acid in wine grapes. In fact, it is found in large quantities only in grapes. Tartaric is a rather complex 4-carbon, 4-oxygen, 6-hydrogen molecule, that lends "crispness" to wine, aids in creating character during aging, and acts as a preservative.

[5] The nearly infinite variety and character of wines result from the chemical elements of grapes, as modified by fermentation and the "magic" of the winemaker. The relative specific chemical constituents of an individual wine vary by grape variety and the industrial chemistry applied to its manufacture. Natural wine (wine that has not been "fortified") is typically 80-90% water and about 8% to 16% alcohol (although wines above 14% may not be called table wines). Additionally, wines have large proportions (100 mg/l to 8,000 mg/l) of phenolics (including tannins), glycerols, amines, amino acids, sorbitols and mannitols and smaller quantities (less than 100 mg/l) of sulfites, acetdehydes (carbonyl), esters, aromatics (benzenes, toluenes and zylenes) ketones, and "higher alcohols" (known as fusel oils), in addition to tartaric, malic, lactic and citric acids - more than a thousand elements and compounds all together.

[6] The most brilliant of these late harvest wines include Trochenbeerenaulease (TBA), wines made from grapes that are left on the vines to "raisin" and are then hand-picked, grape by grape, to produce wines in their finest vintages that sell for several hundred dollars per half-bottle! These and other German dessert wines are among the most extraordinary examples of the wine-making craft.

[7] This is sometimes called The "French Paradox;" referring to the interesting medical conundrum as to why the French people who both consume more red meat and smoke cigarettes far more than, say, Americans (and additionally consume very large amounts of wine, per capita), have fewer heart attacks, less congestive heart failure, fewer body cancers and lower cholesterol levels. The answer appears to lie in the fact that consumption of moderate amounts of red wine daily significantly reduces cardiovascular disease and some other conditions of aging. Medically, red wines (in their natural state) contain significant antioxidants that reduce fat formation within arteries and may inhibit the growth of certain cancers. There is further evidence that wine imbibers have reduced brain deterioration due to aging.

[8] The six terms used in this discussion and their implications are taken from "Project Genome" (October 25, 2005), by Constellation Wines U.S., the largest study of wine consumers ever undertaken.

[9] In fact, it is probably Italy that makes the greatest undiscovered wines. Unfortunately, the Italian wine industry is highly decentralized and disorganized with thousands and thousands of tiny vineyards, many producing mind-boggling vintages - wines all but unknown to the general marketplace.

[10] World wine data come from the Office International de la Vigne et du Vin (O.I.V.). U.S. data are very accurate and complete. The major sources are USDA and the Wine Institute.

[11] For the very best wines, large areas of inexpensive land and suitable climates are not enough. The severe winters in Eastern Washington make possible "hard" wines, analogous to those produced in the three northern regions of France. Such harsh conditions lend themselves to more enduring wines than the "soft" wines of Australia, New Zealand and South America. For instance, South Africa has limiting climatic conditions and although producing quite decent wines, has not produced distinguished wines despite 300 years of wine-making.

[12] In the past forty years higher education in the U.S. has come to accept both viniculture and enology as worthy sciences. In America 70 agricultural schools grant degrees in the arts and sciences related to wine - more schools than the rest of the world combined! France has had a great school of viniculture for 150 years, but no institution is likely to match the University of California at Davis. U.C. Davis is the "Mecca" of viniculture and wine-making. Davis students now include dozens and dozens of undergraduates and graduates from France, Australia, Spain and the wine countries of Eastern Europe. Davis graduates are now Winemaker for many, many domestic prestige wineries and are Vinemaster or Winemaker at some of the world's most prestigious wineries, including some in Burgundy and Bordeaux.

[13] Quite similar to what is happening today in the Napa Valley. Viniculture is an extensive agricultural practice, one requiring large amounts of relatively low cost land, no longer practical in Napa County. This is reflected in the fact that wine today is produced in 46 of California's 58 counties. Many had no producing vineyards ten years ago.

AMERICA'S ENERGY POSTURE. In this era of rising oil and gasoline prices, we Americans have developed a number of comforting "myths" that bear little relationship to reality. Let us examine some of the major issues. We have all heard a version of this statement, "The U.S. is in the clutches of Middle Eastern regimes, who are squeezing us with threatened oil shortfalls and higher prices." There is truth in two of these points: we are, in fact, facing oil shortfalls. This is not bad news in the sense that the reality is the wealth of the world is increasing rapidly; especially that of China and India. Wealth alone creates demand for energy. The energy demands of China and India have simply brought us to a "tipping point." The especial energy squeeze is crude oil, what used to be called "cheap oil." The world is not out of oil, but it is out of "cheap oil." This bears on the second point: higher prices. In the short run, we are going to live for a long time without "cheap oil". The rest is myth. Fact: the U.S. imports a great deal of its oil, but just under 19.5% of it from the Middle East. Fact: the U.S. is the world's second largest oil producer, after Saudi Arabia. Fact: the U.S. consumes 21.4 mbls (million barrels) of oil per day while we import 13.12 mbls per day. Fact: Canada (at 17%), not some Middle East tyranny, is our largest source of imported oil, at 2.11 mmbls (million, million barrels) this year to date. Fact: Mexico (at 13.5%), not the Middle East, is our second largest source of imported oil, at 1.68 mmbls this year to date. Fact: Saudi Arabia (at 12.8%) is our third largest source of imported oil, and our only major supplier in the Middle East, at 1.64 mmbls this year to date. Fact: the great bulk of our remaining oil imports are from Venezuela (at 11%), and Nigeria (at 9.1%), respectively, supplying 1.59 mmbls this year to date, and 1.13 mmbls this year to date (July 30, 2005).

Since 1969, our "secret" energy policy with respect to oil has been to burn cheaper oil produced by other nations; consume theirs while conserving our own supplies. In addition, the U.S. has a Strategic Petroleum Reserve (a "rainy day" reserve), now completely filled to its capacity of 700 mbls. Nor are our future energy resources so bleak, however there is a serious problem; world-wide exploration for oil now only discovers a single barrel of oil for every four barrels of oil consumed. Fact; the U.S. has the world's largest proven total oil reserves, although Saudi Arabia has "probable" total oil 5-8 times our probable total. Fact: the U.S. has almost 523,000 oil wells (many "capped" because of high production costs); almost 65% of all the world's oil wells. Fact: oil at $50 bl in 2004, (and $2.20 at the gas pump) is 32% lower than gas was in 1955, at $4 bl and $0.19/gal, in real dollars. Fact: oil, today, at $70 bl in summer, 2005, (and $3.00 at the gas pump) is 9% lower than it was in 1955, in real terms.

Nonetheless, rapid spikes in the price of both oil and gasoline are bad for our national economy and bad for our personal economy. Our major problem is that we are the world's most profligate wasters of energy. We consume 8 mbls per day in our cars and light trucks. If, as a national policy, we decided that hydrogen should be the fuel for all our cars and light trucks, within five years, we would not need to import a single barrel of oil! We have other bizarre energy behaviors, as well. We actually burn oil to generate electricity. Actually, we already have a proven system of electric generation - nuclear power. Nuclear power has problems of waste management, but these are more manageable than those caused by the burning of fossil fuel. Only 9% of our electric power is generated by nuclear power, but if re-implemented, we would have harnessed thermonuclear power, totally waste-free, before we got to 20% of electric generation. Final Fact: there is lots of "oil" remaining to be exploited. We have enormous unexploited resources of oil in America in tar sands, in oil shale; in bio conversion, coal conversion, and wet gas conversion. Simply, we are going to pay more for the exploitation of all these resources. Even this litany, doesn't consider another incredible possibility, "abiotic oil;" oil that might be recovered from deep sea drilling. There is a theory, now gaining serious attention that asserts that the amount of oil already recovered is much too large to have been created by fossil decomposition during the Carboniferous Age. And that, in fact, all oil is abiotically-created from methane gas under the enormous pressures and heat at the lower edges of the earth's mantle. If so, the creation of oil may be an on-going process, rather than a fossil creation. Time will tell. In the interim there will be no substitute for planning and implementing a wide variety of rational strategies to restructure our present patterns of energy sourcing and consumption.

Spring 2005

2004: A YEAR OF CONTINUING RECORDS.

This issue reviews and summarizes real estate activity and the all time record sales year that was 2004. Very low interest rates, dipping below 40-year lows, continue to stimulate real estate activity on Whidbey Island and throughout the country. Overall residential sales numbers, year to year rose across the board, including average prices, sales numbers and total sales dollars. For the island as a whole, total sales dollars rose 37.7% from last year. For residential SFD properties, on South Whidbey sales dollars were up an extraordinary 99.2% due to the increase in high-priced homes. In Oak Harbor/North Whidbey, total sales dollars rose a modest 5.0%, though average prices rose significantly. Especially impressive were sales in the Coupeville area, often called Central Whidbey; where sales dollars rose 27.7% as that area becomes a market area fully common with South Whidbey. All the north end reflects the heavy U.S. Navy influence in Oak Harbor. After reviewing changes in the real estate market, we make some predictions for the first-half of 2005, makes comments on, Democracy: A Legacy, and close with our usual near-term economic predictions.

ANOTHER EXTRAORDINARY YEAR! For the year total residential sales rose from last year's $250.1 mil. to $344.4 mil. Residential sales numbers rose somewhat from last year's 1,236 to 1,347. Of these 88 were manufactured homes, 100 were condominiums and 69 were multifamily units within 18 properties - the remainder were Single-Family Detached (SFD) homes. Land sales continued the rise, a phenomenon that began three years ago after several "soft" years. Sales dollar volume was up a dramatic 36.7%, while sale numbers were up 20%, compared to last year. Land sales numbers rose from 384, island-wide, to 461 through December 2004. Sales numbers of 'lots' (parcels smaller than an acre) were 64% of sales, 281 versus 187 for acreage parcels. A large number of new lots in Oak Harbor for new construction were created this year. The impact of our Growth Management Act regulations continue - development is being constrained to Oak Harbor. The "average" acreage sale at $157,400 was over twice that of the "average" lot sale ($66,600). In all there were $29.4 mil. in acreage sales and $18.7 mil. in lot sales. Residential sales, of course, remain by far the more important segment of our real estate in numbers and dollar flows.

Standard Single-Family Detached Home Sales,
Except Manufactured Homes,
January-December (2004)

Previously Built Homes

No.

Sales$

Aver$

DOM

%
SHR

Northend (O.H./Cpvl)
494 $120,528,910 $243,986 79 35.0

Southend (Greenbank-South)
502 $158,400,740 $315,539 111 46.1

New Construction Homes

Northend (O.H./Cpvl)
110 $22,466,840 $204,244 89 6.5

Southend (Grnbnk & South)
35 $10,177,615 $290,789 101 2.9

Other Than Standard Single Family Detached (SFD)
Residential Sales (North- South Whidbey 2004)

Manufactured
88 $13,397,827 $152,248 80 3.9

Condominiums
100 $13,841,975 $138,420 71 4.0

Multifamily 69/Units
18# $5,640,300 $81,743 52 1.6

Residential
1,347 $344,454,180 $255,720 88 100

* There are probably more "manufactured" sales that are counted as SFD
#=number of sales, with number of units/unit price

The Table is very abbreviated, because of some limitations with HTML. Contact us to send you a printed or faxed copy, together with the published Tables documenting fifteen years of South Whidbey and North Whidbey sales, by residential category.

In the above Table, DOM refers to the number of "days on market", while "percent share" means the percentage of all residential sales. While Coupeville transitions into a market area similar to South Whidbey, we continue to include in our North Whidbey analysis the Zip codes for Coupeville and Oak Harbor; South Whidbey being everything south of Coupeville - Langley, Greenbank, Freeland and Clinton. What significant changes have occurred during the year? The impressive rise in the price of all real estate is the most remarkable trend. First, North Whidbey is "booming". Absent dramatic personnel reductions at NAS Whidbey (something that might occur in the next few years), the greater Oak Harbor area continues to come into its own as a retirement community. Within the past four years the availability and quality of retail goods has increased impressively. Significant mission changes at NAS into long-range turboprop anti-submarine aircraft with many more officers and senior enlisted personnel per squadron than was the case with previous fighter-bomber basing. Salary increases, those following rising education standards and outside competitive forces in the private sector, along with rising housing allowances (BAH), have stimulated local new construction to record levels (and record prices). Although rental rates are high, many are unwilling to rent older apartments or the tiny condo units that were built in the past twenty-years. Adding to this Navy impact are the increasing number of retirees who "discover" Whidbey Island, and prefer the small town sense of community and shopping in Oak Harbor. Another factor affecting home buying patterns and new construction is the accumulating impact of the State's Growth Management Act (GMA). Our county is especially impacted. GMA basically inhibits development in the counties, except within "urban growth areas". On Whidbey there is only one literal "urban" area - Oak Harbor (though Coupeville and Langley are technically "urban growth areas"). GMA virtually prohibits development elsewhere. Politics have created a vacuum. Oak Harbor has responded.

New affordable development lots in Oak Harbor are now so valuable that successful builders are developing for their own account and selling, at their pleasure, some lots to eager builders needing ready-to-build parcels. Expect this trend to continue. While "spec" home sales in Oak Harbor also rose dramatically in both numbers and prices, such sales continue to decline on South Whidbey. Only 35 new "spec" homes were sold on South Whidbey, but some of these were larger, rather expensive homes. The appearance of new homes selling for more than $350,000 is a new phenomenon on the island. Expensive "spec" homes (those above $300,0000) sell very slowly, however, they are selling. Custom home construction increased in numbers and average values, even though these do not appear as sales data. Condominium sales continue to decline, as a percentage of the market and manufactured home sales have also declined. Homes under $100,000 have virtually disappeared (even condo sales average almost $138,420 - most are on North Whidbey). The number of expensive homes sold rises each year. This past year 297 homes sold for more than $300,000; and 96 of these sold for more than $450,000. These "upper-tier" sales continue to be intriguing as they document the direction of change as Whidbey Island becomes a "preserve" for the well-to-do and the truly wealthy. Sales numbers over $300,000 have increased 80 percent compared to last year.

LAND TRANSACTIONS: IMPRESSIVE During the year there were 461 land sales; 350 on South Whidbey (including the Coupeville area). Sales on South Whidbey totaled - $34.7 mil, almost 74% of total land sales dollars. On North Whidbey there were 111 sales, totaling $12.4 mil. Sales for land totaled $47,136,600. This is the third year in which land sales have strengthened dramatically. On North Whidbey the average transaction price, including both lots and acreages, is $111,711, skewed by a few very large sales. Lots sold, on average, for $68,632. On South Whidbey the "unintended consequence" of GMA is to further push the south end toward becoming a "rich enclave of the privileged". On South Whidbey the average land sale is almost $106,735; and 59% of the transactions were acreages.

DEMOCRACY: A LEGACY. We Americans are so troubling to the people of other nations. Our fascination with our republican form of democracy, and the near-religious zeal with which we promote 'democracy' to other nations is annoying to friend and foe alike. James Madison, writing in The Federalist No. 51, observed, 'In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself'. Our ascendancy as a nation state is largely why the 20th century will be called the 'Democratic Century.'

In 1900 monarchies and empires dominated the nation states of the world. An insular America actively ignored emperors and kings, provided they stayed out of the affairs of the 'New World'. Our tenuous experiments with 'empire', because of the Spanish-American War, continue to haunt us to this day: think Cuba, Puerto Rico and the Philippines. Only 25 states (with a mere 12.4% of the world's population) could have reasonably been described as democracies in 1900. By 1950, America had 'once again' made the world 'Safe for Democracy' ' finally ending in 1945 the war that actually began in 1914. With the exception of the U.S., the world was exhausted. European Colonialism was in collapse; only our political ineptitude let the Soviet Union smother the Baltic states and Eastern Europe, including the eastern-third of Germany. Despite the manifest totalitarian communist takeovers in Asia, America remained politically committed to expanding democracy with almost religious zeal. By 1950 42 nation states (42.9% of the world's population) lived under at least limited democratic practices. As the last decade of the century ended, the political skill of Ronald Reagan engineered the economic bankruptcy of the already politically exhausted 'Evil Empire.' So, by 2000, electoral democracies dominated for the first time in world history. American energy, money and leadership caused the world to adopt universal suffrage and the 'rule of law' in governance. By 2000 democracies outnumbered the other nation states - 120 of the total 191; representing 62.5% of the world's population. This profusion of 'democratic' states was more than matched by the proliferation of nations: 55 in 1900, 83 in 1950 and 191 in 2000. China is a special case. She has already 'crossed the Rubicon' and can no longer have the political will to enforce totalitarian communism. The other communist states are primarily an annoyance. Only one major problem stifles democratic governance ' the rise of fundamental Islam in control of 26 'non-democratic' nation states with 638.9 mil. people - 10% of the world's population*. It is not accidental that their fanaticism is much focused on the U.S. as a 'great Satan', prelude to the infamy of '911.' The ease with which the Taliban were dispatched should not be confused with the ease with which Afghanistan will adopt democracy ' but they have made a good start. America is now zealously engaged in introducing democracy to Iraq. Together, these two states govern 52.9 mil. people. It may work. If it does the noise of dominoes falling will be deafening!

We do not know whether 'democracy' is the final form of government for a world approaching 200 nation states. Possibly not, for democracy implies first and foremost equality, not necessarily followed by responsibility! In a relative sense John Adams was probably correct in observing, 'Democracy never lasts long. It soon wastes, exhausts, and murders itself.' If G. W. Bush is able to pull off elections in Iraq as he has been apparently successful at doing so in Afghanistan, he will likely be remembered in history as our most 'mis-underestimated' President.

*This figure is based on our inclusion of countries with more than 50% Muslim populations and non-democratic governments: Afghanistan, Algeria, Azerbaijan, Bahrain, Brunei, Burkina Faso, Egypt, Eritrea, Ethiopia, Iran, Iraq, Kazakhstan, Kuwait, Maldives, Morocco, Oman, Pakistan, Qatar, Saudi Arabia, Somalia, Sudan, Syria, Tunisia, Turkmenistan, United Arab Emirates and Uzbekistan

ECONOMIC PREDICTIONS FOR FIRST-HALF OF 2005. 2004 began with lumpy and conflicting economic data; though it was clear that we were close to recovering fully from the economic impact of '911'. Despite the third-quarter impact of four major hurricanes, the year closed on a strong note. The impact of '911' on our airlines, hospitality and travel industries is gone; finally fully recovered; now gone on to record levels. Airlines have all-time passenger traffic (though the impact of high energy costs remains a very real threat ' especially to two of our major carriers: Delta and United). Through fresh entrepreneural energy, re-thinking and 'creative destruction', Southwest Airlines has become the nation's biggest domestic carrier; while total domestic passenger bookings rose from 439.6 mil. in 2003, to more than 631 mil. this year ' a whooping 43.6% increase! The travel industry is once again booming. Cruise ship sales are 12.5% ahead of even last year's decent bookings and 'passenger days' (time aboard a cruise) increased 9% in 2004. Disney's Resorts set all-time theme park and lodging records. Our national economy has turned around with a vengeance. Investor confidence is rising, even 2.3 mil. jobs have been restored in the past 15 months. Still these are mainly the traditional jobs easily measured by government ' manufacturing jobs, agricultural jobs and urban wage-earner jobs. Past 'union' employment is gone and will not return ' outsourced, overseas ' victim of change into the 21st-century global economy and the "Third Wave." Since 1999 more jobs have actually been created in the entrepreneurial areas of self-employment and small business than were lost to the 'unemployment' counted by government. The economic phenomenon of our century is the flood of self-employment. The product of these new jobs is the engine driving our incredible GDP. New employment growth is about three-quarters lower-paying service employment and about a quarter extremely high-paying technology employment (open only to those with technical educational and previous employment experience). There are no more "jawbs"! Our basic economy produces more and more with less and less employment, while our specialized economy requires labor intensity ranging from minimum wage labor to technology workers producing "tens of millions" in added value to the national and regional economies.

During 2004 economic growth continued at twice the rate of inflation - about 4% for the year. We believe that when final year-end data are available in March or April, our GDP will have grown 4.2% to almost reach $12 tril. Keep in mind that given the scale of our huge economy even modest growth represents almost $450 bil., annually. Given world uncertainties, this is an excellent record. By way of contrast the rest of the world is foundering, Japan and the EU especially, their circumstances made worse for them by the weakening U.S. dollar and high oil costs which effect our economy much less than other developed nations. Europe is fully in cultural decline - victim of its proud 32-hour workweek with 6-week vacations, poor productivity and runaway public expenditures. Meanwhile, our consumer confidence is uneven though actual consumption remains strong, driven partly by very low interest rates. The housing market continues to be strong, now representing 15% of GDP, however, it is unlikely that 2005 will match 2004's record of 8.1 mil. sales. New construction is headed for a significant slowdown simply because recent rapidly rising prices, absent rising incomes, means that qualified buyers are falling along the wayside. Also, beyond another year at most, very low interest rates will not continue to stimulate as the marketplace for homes and automobiles becomes saturated. Federal tax cuts provide further stimulus, but the large federal government expenditures for defense and anti-terror activities presage rising government expenses, whether from an expanding economy or deficit financing. Also on the strong side, productivity is improving impressively, agriculture is strong, and corporate profits are rising. Stocks have recently exploded but will continue to be volatile, although companies with real earnings should continue to see impressive stock price rises. The bond market is very strong and should continue to be strong as oil prices stabilize and decline and the rest of the world looks for a safe haven for their dollars. Even "whiney" Europe has larger bond investments in the U.S. than it has investment in itself! As for stocks without earning capability, they will continue to have their prices manipulated by the securities industry and speculators - as they have for the past nine years. We'll repeat this again, we live for many years to come in great uncertainty. Our nation continues to be vulnerable to events over which we have limited control. With luck and effort, we will tame the "Barbarians Inside the Gates". As we noted last year, it will be an interesting "ride".

Spring 2004

A YEAR OF RECORDS.

This issue reviews and summarizes the all time record sales year that was 2003. Very low interest rates, near 40-year lows, continue to stimulate real estate activity on Whidbey. Overall sales numbers, year to year are up across the board, except for extreme South Whidbey which saw a drop in residential average prices and sales numbers for the year. In general though, prices continue to rise. Dollar flows for all real estate sales island-wide are up 7.7% from last year. For residential SFD properties, on South Whidbey sales numbers were down 6.5%, while they rose 3.7% in Oak Harbor/North Whidbey - a slight rise in sales numbers overall. Especially impressive are sales in the Coupeville area, often called Central Whidbey; these rose over 10% as that area becomes a market area common with South Whidbey. All the northend reflects the heavy U.S. Navy influence in Oak Harbor. After reviewing changes in the real estate market, we make some predictions for the year 2004, makes comments on new "high-tech" housing communications technologies, and close with our usual near-term economic predictions.

ANOTHER EXTRAORDINARY YEAR! For the year total residential sales rose from last year's $234.3 mil. to $250.1 mil. Residential sales numbers rose somewhat from last year's 1,187 to 1,236. Of these 70 were manufactured homes, 75 were condominiums and 89 were multifamily units within 13 properties - the remainder were Single-Family Detached (SFD) homes.

Land sales continued the rise begun last year after several "soft" years. Dollar volume was up a dramatic 45%, while sale numbers were up 34%, compared to last year. Land sales numbers rose from 287, island-wide, to 385 through December 2003. Sales numbers were roughly balanced between lots and acreage's, 203 versus 183, despite the large number of new lots in Oak Harbor for new construction. The impact of our Growth Management Act regulations continues - development is being constrained to Oak Harbor. The "average" acreage sale at $121,600 was over twice that of the "average" lot sale ($60,800). In all there were $22.3 mil. in acreage sales and $12.3 mil. in lot sales. Residential sales, of course, remain by far the more important segment of our real estate in numbers and dollar flows.

Standard Single-Family Detached Home Sales,
Except Manufactured Homes,
January-December (2003)

Previously Built Homes

No.

Sales$

Aver$

DOM

%
SHR

Northend (O.H./Cpvl)
542 $108,504,910 $200,194 84 44.7

Southend (Greenbank-South)
303 $79,660,166 $262,905 141 32.7

New Construction Homes

Northend (O.H./Cpvl)
128 $27,840,768 $217,506 121 11.4

Southend (Grnbnk & South)
18 $4,933,692 $274,094 183 2.0

Other Than Standard Single Family Detached (SFD)
Residential Sales (North- South Whidbey 2003)

Manufactured
70 $9,498,860 $135,698 125 2.8

Condominiums
75 $9,600,728 $121,968 103 3.9

Multifamily 89/Units
13# $3,541,746 $39,795 98 1.4

Residential
1,236 $250,051,140 $205,207 118 100

* There are probably more "manufactured" sales that are counted as SFD
#=number of sales, with number of units/unit price

The Table is very abbreviated, because of some limitations with HTML. Contact us to send you a printed or faxed copy, together with the published Tables documenting thirteen years of South Whidbey and North Whidbey sales, by residential category.

New affordable development lots in Oak Harbor are now very valuable. Expect this trend to continue. While "spec" home sales in Oak Harbor also rose dramatically in both numbers and prices, such sales continue to decline on South Whidbey. Only 18 new "spec" homes were sold on South Whidbey, but some of these were larger, rather expensive homes. Expensive "spec" homes (those above $300,0000) sell very slowly, however, they do sell. Condominium sales continue to decline, as a percentage of the market and manufactured home sales have also declined. Homes under $100,000 have virtually disappeared (even condo sales average almost $122,000 - most are on North Whidbey). The number of expensive homes sold rises each year. This past year 165 homes sold for more than $300,000; and 50 of these sold for more than $450,000. These "upper-tier" sales continue to be intriguing as they document the direction of change as Whidbey Island becomes a "preserve" for the well to do and the truly wealthy. Sales numbers over $300,000 have increased over 40 percent compared to last year.

LAND TRANSACTIONS: IMPRESSIVE During the year there were 385 land sales; 215 on South Whidbey totaling - $21.4 mil. On North Whidbey there were 168 sales, totaling $13.1 mil. Sales for land totaled $34,525,488. This is the first year in the last five in which land sales have strengthened. On North Whidbey the average transaction price, including both lots and acreage's, is $77,956. On South Whidbey the "unintended consequence" of GMA is to push the south end especially toward becoming a "rich enclave of the privileged". Here the average land sale is almost $100,000; and 56% of the transactions were acreage's.

WHIDBEY ISLAND AND BROADBAND COMMUNICATIONS. The "soul" of the New American networked information economy is faster, more effective communications technology. As these technologies are all electronically-based, speed requires wider bandwidths of electro-magnetic force, so is referred to as 'broadband'. Recent studies estimate that wide broadband deployment just to residential customers would generate 1.2 million new, currently non-existing jobs that (almost redundant to add), would be among the highest paying jobs in the nation. Broadband technologies provide for easier more thorough access to goods and services, information, entertainment, health care delivery, continuous distance-learning opportunities and new more effective ways to interact with government, colleagues, friends and family. This is only a marginal part of the larger economic opportunity, however. Improved information technologies are responsible for most productivity gains and it is these gains that let us do more with less resource, fewer people - cheaper and faster than previously possible. The awesome American economic engine is so resilient precisely because of our broad acceptance of technology.

Washington State, especially Puget Sound, is a world center for telecommunications, software, wireless telephony and broadband technology. Whidbey Island is especially well endowed with these new technologies. Our local telecommunications providers are at the leading edge of telephony and fiber optics. The average Whidbey Island new home has 2.7 active lines not counting satellite or other wireless connections. Though a small customer base, we have more miles of fiber optic cable in the ground, per capita, than any other residential place on earth. One wonders why larger businesses have not located here; analogous to the dozens and dozens of smaller software, telecom, ISP and specialized technology development firms now here. Please ask us questions about the local quality and availability of advanced communications technologies. They are important and we pride ourselves in having specific training for all our consultants. When your previous real estate advisor responds, "what is 'broadband'?", you'll understand.

Spring 2003

A RECORD YEAR FOR RESIDENTIAL REAL ESTATE.

This issue reviews and summarizes changes in the Whidbey Island real estate market for the year 2002. We document the more dramatic changes that followed the events of "911", now over a year ago, make some predictions for real estate performance in the year 2003, and close with our usual near-term economic predictions.

THE EXTRAORDINARY YEAR OF 2002. Notwithstanding the rather slow recovery from a business recession (or maybe it was a near recession) island residential real estate dollar flows during 2002 rose an impressive 27.6%; driven in part by interest rates hovering around forty-year lows. Total sales dollars rose $24.6 mil., to a record $199,646,080. There were, north and south, approximately 1,014 single-family residential housing unit sales - 881 were single-family detached homes, 73 were "manufactured" homes and 60 were condominium units. Additionally there were 66 multifamily units, in 14 sales closed during the year.

Land sales rose in sale numbers for the first time in four years, however dollar volume remained similar to last year. As our smaller land parcels; those created before our 5-acre zoning regulations, are absorbed by the marketplace, they cannot be duplicated. Therefore increasingly our land sales represent higher-priced acreage properties rather than lots. Residential sales are, of course, by far the more important segment of our real estate in numbers and dollar flows.

Standard Single-Family Detached Home Sales, Except Manufactured Homes (2002)

Previously Built Homes

No.

Sales$

Aver$

DOM

%
SHR

Northend (O.H./Cpvl)
558 $98,131,950 $178,305 80 41.9

Southend (Grnbnk & South)
323 $94,655,622 $293,051 114 40.4

New Construction Homes

Northend (O.H./Cpvl)
88 $17,053,080 $193,785 114 7.3

Southend (Grnbnk & South)
19 $5,013,625 $263,875 196 2.1

OTHER THAN STANDARD SINGLE FAMILY DETACHED(SFD)
RESIDENTIAL SALES(North & South Whidbey 2001)

Manufactured
73 $8,459,097 $116,289 85 3.6

Condominiums
60 $6,858,508 $114,308 107 2.9

Multifamily 66/un
14# $4,160,870 $56,998 147 1.8

Residential
1,187 $234,332,752 $215,578 99 100

* There are probably more "manufactured" sales that are being counted SFD
#=number of sales and number of units/unit price

In the above Table, DOM refers to the number of "days on market", while "percent share" means the percentage of all residential sales. North Whidbey includes the Zip codes for Oak Harbor and Coupeville; South Whidbey is everything south of Coupeville - Langley, Greenbank, Freeland and Clinton. What's going on with home sales? Other than the impressive rise in all residential sales last year, trends are a continuation of events we have discussed over the past four years. Oak Harbor area is coming into it's own as a retirement community. Within the past three years the availability and quality of retail goods has increased impressively. Salary increases for the Navy, have stimulated local new construction to record levels (and record prices). Although rental rates are high, many are unwilling to rent older apartments or the tiny condo units that were built in the past decade. Adding to this Navy impact are the increasing number of retirees who "discover" Whidbey Island, but prefer the small town sense of community in Oak Harbor.

New affordable development land is so valuable that successful builders are developing for their own account and selling, at their pleasure, some lots to the many eager builders needing ready-to-build parcels. Expect this trend to continue. While "spec" home sales in Oak Harbor rose quite dramatically in both numbers and prices, such sales continue to decline on South Whidbey. Only 19 new "spec" homes were sold on South Whidbey, but some of these were larger, rather expensive homes. The appearance of new homes selling for more than $350,000 is a new phenomenon on the island. Expensive "spec" homes (those above $300,0000) sell very slowly, however, they are selling. Custom home construction increased in numbers and average values, even though these do not appear as sales data. Condominium sales continue to decline, as a percentage of the market and manufactured home sales have also declined. Interestingly, average sale values continue to rise, quite independently of changes in transaction activity. Homes under $100,000 have virtually disappeared (even condo sales average almost $115,000 - but most are on North Whidbey). The number of expensive homes sold rises each year. In 2001, 118 homes sold for more than $300,000; and 35 of these sold for more than $450,000. These "upper-tier" sales continue to be intriquing as they document the direction of change as Whidbey Island becomes a "preserve" for the well-to-do and the truly wealthy. Sales over $300,000 increased almost 30 percent during 2002.

The above Table is very abbreviated, because of some limitations with HTML. Contact us to send you a printed or faxed page, together with the published Table documenting 12 years of South Whidbey and North Whidbey sales, by residential category.

Those readers interested in previous discussions of these trends, or past articles on real estate and American culture should visit our main real estate "Website":www.whidbey-realestate.com/whidinv.htm.

UNIMPROVED LAND TRANSACTIONS: ANOTHER DOWN YEAR. During 2001 there were 249 land sales; 107 on South Whidbey totaling $14.3 mil., and 142 on North Whidbey totaling $12.0 mil. Those land parcels sold, were, in the aggregate, $26.3 mil. This is the third successive year that land sales numbers have declined. However, while they declined 11 percent in sale numbers, sales rose 17 percent in dollar volume, driven by still rising average prices. On North Whidbey the average transaction price, including both lots and acreages, rose impressively to $84,832 from last year's $76,807 even as total sales fell. Forty-six percent of these were lot sales. Lot sales averaged $54,918, while 54% of sales were acreages that averaged $110,809 per parcel. Both were all time average price records. On South Whidbey the "unintended consequence" of GMA is to push the south end further toward becoming a "rich enclave of the privileged"; the average land sale was $133,453; and 46% of the transactions were acreages. The very high average price is skewed because of three acreage land sales that aggregated to more than $6.3 mil. (one appears in the database as a home sale, but was a "value in land" transaction). In all, 59 lots were sold, at an average price of $59,259. One reason for the decline in lot sales is the complete collapse of sales at the once vigorous Holmes Harbor Golf Course.

OUR FAILING OCEANS. Oceans are probably the birthplace of life. As such, they are us. When we were few and our technology was primitive, the oceans generously provided protein-rich food for mankind. Now our numbers are large and our technologies are devastatingly efficient so life in the oceans is suffering. In addition to over fishing we wantonly poison our seas with detritus trash, sewage, hydrocarbons and many other bioactive substances that are changing ocean environments. It is a shame, but many large cities, even among the industrialized nations, still today release raw sewage into our seas. What are the symptoms of over exploitation? First, declining fish populations, then similar arguments can be made of marine mammals, then depletion of food sources such as the collapse of the Pacific anchovy, also declining numbers of large individuals and loss of older females with gigantic egg capacity to mention some. Then there the destruction of biogenic reefs, egregious ongoing violations of catch limitations and international agreements, finally manifest in trash fishing in the last 30-years pollock, dogfish, pilchard and monkfish - today even barnacles and jellyfish. Through overfishing we have decimated the once vast resources of the sea, and are perilously close to upsetting the balance of nature. Where even forty years ago we caught 1,500 lb. swordfish, and 1,000 lb. Bluefin tuna, today 200 lb. fish are giants. Ah, but if fishing were regulated won't the juveniles just grow into the giants of yore? The answer in population ecology is no. Habitats have been modified or destroyed. The food chains of carnivores especially, have themselves been modified by over exploitation. And its not just fish, sea mammals and other aquatic life have for some species been lowered to total numbers too low to effectively maintain populations. Though the oceans are vast to we humans, the vastness, along with the lack of sovereignty, has them out of sight and mind. Finally fishing is regulated, that's not the solution, that's part of the problem! In addition to rules that force adjustment to politically motivated, unscientific, unsustainable yields, we have illegal, unregulated and unreported fishing, derelict fishing (abandoned nets, pots and jigs and other fishing debris). Millions of tons of such debris haunt the world's oceans and continue to kill needlessly, not to mention cyanide fishing in Asia and Africa and so forth. Let's examine this vast commons from the perspective of international fishing and the destruction of sea environments.

The Problem: Over Exploitation. Approximately 80% of the world's populations occupy coastlines, so the exploitation of food resources from the sea is natural. However, from primitive technologies the spear and the fishhook, we now exploit the seas with huge sea-going factory ships, drift nets that ensnare and kill indiscriminately, and long liners with mile after mile of line and thousands of hooks baited not only to attract target species, but sea mammals, turtles, birds and other life. Millions of seals and several hundred whales are killed each year. Seals as by catch, trapped in drift nets or trawls and whales, in their lawful and unlawful taking by Japan, Korea, and Norway, now Iceland. Tens of thousands of birds, often penguins in southern waters, are drowned, hooked on baited long lines. Then there's the great trawler rape, more heinous than drift netting. Trawls don't just catch fish; they modify environments by bulldozing sea bottoms. Common sense tells us that the cold arctic has slow recovery from environmental damage. Tracks on the tundra are erased by nature in as little as 60 years. Witness, trawling off the coasts of Norway that today destroy in one pass, coral beds that have been constructing themselves in that cold water for 4 million years. In some cases the corals are 4,500 years old! Many fish stocks are so depleted they will never again be bountiful: orange roughy, white marlin, North Atlantic cod, blue marlin and the Bluefin tuna. Bluefin, historically often over 1,000 lbs., now so rare but so fashionable in oriental cuisine that a large fish (today a mere 100 lbs.) is worth $20,000-$30,000 on the wholesale Asian market this for a single fish!

The demand for food from the sea is enormous today. The U.S. alone consumes 9.2 bil. lbs. of ocean-caught seafood annually, of which an estimated 80% is imported. This level of consumption cannot be sustained. Such fishing involves 3 mil. active fishing vessels of which 1.2 mil. are trawlers. Together they account for about 99 mil. tons of targeted catch and almost 30 mil tons of by catch (the 30% of life that is destroyed but unused for consumption). What happens in a fishery where other sea life is caught by accident? Say a trawl brings aboard 20 tons of life from a single set. Further let's even say that an international observer is aboard. When unloaded, the trawl contains on average six tons of life that is out of season, unfished, protected or endangered. What happens to this bounty? This may be difficult for the reader to believe. It cannot be processed because of treaty regulations, so is returned to the sea, dead, to become a product of decay and pollution - no service to humanity. Unbelievably, this happens even in U.S. fisheries waters! Wild shrimp are trapped or trawled in a travesty of waste in which for every pound of shrimp, 5.2 lbs. of other life is destroyed and unused. The most egregious example: Asian prawns. For every lb. of Spot prawns retrieved for market, there are 10 lbs. of by catch. What are the alternatives to this frightening waste?

Neither aquaculture nor fish farming will in the short run make up for the food now supplied by the oceans. Total estimated aquaculture production was 39.6 mil. tons in 2000. Presently the technology of fish farming has serious environmental challenges because of the accumulations of waste and the large amount of food stock from other animals necessary to sustain higher food chain fish and shellfish. Further, there is too much emphasis on salmon raising (species altogether well on their way to being man-made). Someday undoubtedly these efforts will produce better results, alternative protein sources will be exploited and the world will stop the senseless wasting of sea protein that is not even consumed. Until then?

The Solution: Abstinence. What can arrest this appalling waste? Attempts to regulate greed never work unless there are consequences. Commissions on Ocean Policy don't work. International agreements haven't worked. Ignored regulations can't work. The United Nations won't work. The bungling agreements negotiated by the unelected, inept and corrupt organizations of the United Nations have not and will not work because there is no sovereignty in the world's oceans. What will work is to close the world's oceans and seas to all harvesting for three years; all harvesting, three years. By this we mean the seas covering lands under international treaty seas over land that does not belong to a sovereign nation. This could be achieved by the U.S. organizing and leading agreements among willing nations and thereafter simply announce than all pelagic fishing will cease. In that three years the world's marine scientists will be better able to assess habitat conditions and oceanic fishers will have left the business. The U.S. could lend its magnificent naval skills and technology to track, board and seize all violators everywhere outside national territorial waters. The seized catch would be processed if possible and sold in the international marketplace, the crews being imprisoned and brought before maritime tribunals, and the confiscated ships and all gear sold to partially off-set the costs of enforcement. It would not be long before fishing our commons became too expensive.

ECONOMIC PREDICTIONS FOR FIRST-HALF OF 2003. Our national economy struggles following the loss of investor confidence in new business investment, together with fairly large-scale employment layoffs. However, modest positive growth continues - probably about 4% when the data are assembled by March. Given the scale of our huge economy even this represents almost $350 bil. in growth. Consumer confidence has declined but actual consumption remains strong. The housing market is especially strong, hovering near an all-time record of 6.6 mil, housing units. Forty-year low interest rates have provided a major stimulus to housing and to automobile sales; also near record perfomance. Unfortunately, beyond another year, very low interest rates will not continue to work as the marketplace for houses and automobiles becomes saturated. Federal tax cuts will provide some further stimulus, but the large federal government expenditures for defense and anti-terror activities while a short-term stimulus, tends to create longer term complications. On the weak side, unemployemnt will continue to rise and the travel and hospitality industries (and their affected cohorts) will remain weak for the foreseeable future. On the strong side, productivity is improving impressively, agriculture is strong, and corporate profits appear to have "turned around" and are rising. Stocks will continue to be volatile although companies with real earnings will see significant recovery in their stock prices in the months ahead Others without earnings will continue to have their prices manipulated by the securities industry and speculators - as they have for the past five years. We live now and probably will for many years to come in great uncertainty.

Autumn 2002

THE SECOND HOME PHENONMENON. The most important phenomenon in contemporary real estate is the explosion in the purchase and ownership of second homes. Such homes are the status symbol of wealth as we enter the new millennium. During the entire decade of the 1980's American's owned an estimated 320,000 second homes. In the intervening decade, by January 2000, U. S. government estimates suggest there were 7.7 million such ownership's. One in ten families own a second home (including time shares). Six in ten families want to own one, or more. About half of these ownership's are within 300 miles of the principal residence; and 70 percent are at river, lake, beach, or ocean view locations.

A National Association of Realtors study indicates that second home purchases have increased dramatically and that the equity increase of such purchases has risen 27 percent from 1999 to 2001, from an average of $127,000 to $162,000 (including timeshares!). This price rise is more than twice what "family homes" have appreciated. Eighty percent have been vacation homes, the remainder investment homes, stimulated by the tax law changes of 1997. Second homes may be simply defined as those where the owners reside elsewhere. Such homes could be weekend getaways close to home, seasonal houses (often to escape snow or heat), homes purchased based on retirement planning, or sometimes "investment" homes purchased in anticipation of retirement and rented until then or until plans change. In many cases these homes are condominiums, even timeshares. Here on Whidbey Island, there are relatively few investment homes, no timeshares and virtually no condominiums; all are single-family homes (SFD). To create a foil for comparison, we'll call other SFD homes, "family homes".

It might surprise many to discover that just how large a segment of the marketplace second homes are on Whidbey Island. When compared with "family homes", they are more expensive on average and tend to cost more per square foot, primarily because they occupy more valuable land (view and waterfront). The largest numbers of second homes owned are located, in order, in Florida, California, Texas and Michigan. The highest ratio of second homes to population are, in order, Maine, Vermont, New Hampshire, Alaska, Delaware, Florida, Arizona, Wisconsin, Montana and Hawaii, with Washington estimated to displace Montana during 2002.

CURRENT WHIDBEY ISLAND REAL ESTATE ACTIVITY. Real estate activity on Whidbey Island is stronger than last year and may be expected to accelerate through year-end. As last year was our record year, we predict that 2002 will finish with a new sales record. Most of our residential properties (more than 85%) are Single-Family Detached (SFD) homes. Land sales, after declining for the past four years, also show increased activity this year. Increases have been stimulated by low interest rates (now at 40-year lows), and the continuing "flight to sanity"; an escape for many from both urban and suburban problems.

Through June, we have had 466 SFD sales, averaging $179,270. These sales are for all Whidbey Island, north and south. They were on the market for an average 102 days. Last year (2001), through the half-year, we had 413 such sales, averaging $182,078. These were on the market 105 days on average. Thus far this year the SFD sales aggregate to $80.7 mil., versus last year's $77.2 mil. Thus sales are running about 4% higher in dollar volume and over 12% in sales numbers.

WHIDBEY ISLAND'S SECOND HOME MARKETPLACE. Second homes here range from weekend "getaways" close to home, to seasonal homes (to escape heat or snow), to planned retirement homes. While there are no firm data on which specific sale by sale determinations can be made, we estimate that so far in 2002, 39% of SFD sales are "second homes". The sales averaged $302,903. These homes sold for $148 per square foot of finished living space, and averaged 2,031 SF in size. Last year 38% of sales appear to have been "second homes", averaging $281,000 per home, 1,987 SF, and selling for $132/SF. In contrast, "family homes" sold this year average 1,867 SF, selling for $112/SF ($210,487 per transaction). These buyers are almost always well to do; some evidently very wealthy. Because so many of these sales represent "upper-tier" prices (either expensive parcels that are large, waterfront, or very "up-spec" construction, consideration of "upper-tier" sales is instructive.

During the first half of 2001, we had on Whidbey Island, 31 sales of SFD homes that sold above $300,000. Of these, seven sold above $450,000. The great majority of these occur on South Whidbey (24), with three in Coupeville, and four in Oak Harbor. Such sales have increased dramatically in the first half of 2002. This year, there have been 39 such sales over $300,000 and 15 over $450,000; 28 were on South Whidbey, one in Coupeville, and 10 in Oak Harbor. Sixteen sales were waterfront property and 20 (some of the same) were acreage properties; three were "trophy" properties. These aggregated to $18.7 mil., versus $14.1 mil. last year. Average "on market" times were 159 days.

UNLOVED IN A WORLD OF SCARCITY. We American's are so delightfully naive! Why do we have so much trouble accepting that most of the world "hates" us? Here's why. We now live in a world with 6.1 billion people alive at one time. If, for the sake of convenience, we shrank this huge population to 100 persons, for handy calculation, here is what the population of "man" would look like. Six of the 100 would possess 59 percent of the entire world's wealth, and statistically all six would live in the U.S. About 80 would live in what we would call sub-standard housing, 73 would be illiterate, almost 50 would suffer chronic malnutrition, one would be near death, and one of the 52 who are women would be near giving birth. Only one would have spent as much as a single day in college, and only one would own a computer. If you have a refrigerator you are statistically likely to be richer than 75 percent of the rest of the world. If you have even $1.00 in a bank or security account, you are among the most wealthy nine percent of the world's people. Fifty of this population do not have a right to assemble, and are under religious or personal persecution. Finally, one in six have been imprisoned, tortured or starved by their own governments. Now does anyone doubt why we are not universally loved?

ENRON ENDNOTE. What are the lessons we can learn from Enron? Some have begun to argue that Enron represents a failure of the economic "free market" system. Good lord, it's a "free market" success. The ever-pandering people of California don't want to pay high electric costs. However, they are also unwilling to permit new electric production in the state. So, Sacramento legislated electric rate cuts (illegal price-fixing), bought Enron-created peak-hour discounted electricity (thoroughly stupid), "winked" while Enron gouged businesses for off-peak power useage (diseconomic); and when Enron proved to itself that their model of "non-market" economics would not produce profits, they did what any "crook" would do. First, they invented shady forms of energy partnerships to disguise losses (contract fraud), snookered stockholders (stock fraud), contributed huge sums to PAC's to influence legislators and suborned their accountants into lying about their finances (criminal conspiracy), and finally did the first right thing in their six years of glory - went bankrupt.

Now Hawaii is undertaking bold experiments in energy lunacy. Sun every day is not enough for them. Their governor wants inexpensive gasoline. Is there an echo here? Shouldn't the governor talk to Gray Davis who tried to bring low peak-hour electric charges to Californians, via Enron? Rather than calling it "price-fixing", the words have been carefully parsed to suggest it's "profit limiting", to prevent gouging by greedy oil companies. Hereforward, permitted profits will be gauged by the weighted average of gasoline sales profits in California. That Hawaii is too far from gasoline is going to be ignored. The predictable outcome? First, a political sigh of relief, followed by inconvenience and shortages, then runaway prices, finally, price fixing and profit-gouging lawsuits, and government scandal. Hawaii should just learn to live with its sunshine.

ECONOMIC PREDICTIONS FOR SECOND-HALF OF 2002. Despite everything our national economy continues to percolate impressively. The recent collapse of stock prices may signal that "sanity" is on its way back into the market. In fact, statistically the stock market remains higher than traditional levels of earnings would support. We say it again. Why do people think that constantly rising stock values are their due? Why, for instance, did anyone ever buy Enron? What did portfolio managers think they were buying - an energy company that doesn't produce energy, doesn't "own" things, has no history, and just occupies a huge building filled with lots of attorneys. Come on folks, what did you expect? Here's our economic scenario. Six months ago we had rapidly rising unemployment, now that has slowed. Six months ago consumer confidence was very high, now that's declining because of the "accounting" scandals. Next, the cost of government operations is rising very fast, but the economy is growing despite this gloomy news. We're at war and the economic costs of taming terrorism are going to be very high. On the other hand, we continue to have high durable goods sales (near record auto sales), very high new home sales and terrific existing home sales in most areas of the country, high but softening retail sales and near record employment; all with interest rates at 40-year lows! What's going on is that things are going pretty well economically, we just listen too much to the news media. It's not Enron, it's not "dot-coms", it's not even General Motors. It is millions of small businesses, together with a significant number of "big" businesses, those who happen to know who they are: Johnson & Johnson, Hewlett Packard, Procter & Gamble, etc. This working "core" of business is what's really important to our economic well being; also, it is they and their employees who pay most of the tax base. Other factors include: a world that is largely in recession and unlikely to recover quickly no matter what happens in the U.S. Your intrepid editor just had the experience of buying "Euros" in Amsterdam for $1.03, eighteen months after that currency was released at $1.60! How would we Americans face a challenge like that? The national economy will continue to rise, but remain in the current trough. Inflation is dead. Unemployment will continue to rise. National homes sales in 2002 will continue well above the 5-million unit level. Not too bad actually!

Spring 2002

A RECORD YEAR FOR RESIDENTIAL REAL ESTATE.

This issue reviews and summarizes changes in the Whidbey Island real estate market during 2001. We will review the more dramatic changes, make some predictions for real estate performance in the year 2002, and close with our usual near-term economic predictions.

THE INCREDIBLE YEAR THAT AMERCICANS WILL NEVER FORGET. Notwithstanding the three months following "911", island residential sales rose a dramatic 18 percent in 2001. Total dollars rose $14.8 mil., to a record $183,654,743. There were, north and south, approximately 998 residential sales - 872 were single-family detached homes and 126 were "manufactured" homes, condominiums and multifamily units.

Land sales fell in sale numbers but rose 17 percent in dollar volume (the reasons for the decline are discussed below). Residential sales are, of course, by far the more important segment of our real estate in numbers and dollar flows.

Standard Single-Family Detached Home Sales, Except Manufactured Homes (2001)

Previously Built Homes

No.

Sales$

Aver$

DOM

%
SHR

Northend (O.H./Cpvl)
476 $80,411,789 $168,932 94 43.9

Southend (Grnbnk & South)
279 $64,986,872 $232,928 130 35.4

New Construction Homes

Northend (O.H./Cpvl)
96 $17,466,010 $181,938 125 9.5

Southend (Grnbnk & South)
21 $4,760,421 $226,687 187 2.6

OTHER THAN STANDARD SINGLE FAMILY DETACHED(SFD)
RESIDENTIAL SALES(North & South Whidbey 2001)

Manufactured
52 $5,948,407 $114,392 119 3.2

Condominiums
65 $6,703,760 $103,135 148 3.6

Multifamily 66/un
9# $3,377,484 $51,174 160 1.8

Residential
998 $183,654,743 $184,023 114 100

* There are probably more "manufactured" sales that are being counted SFD
#Units and price/unit

The above Table is very abbreviated, because of some limitations with HTML. Contact us to send you a printed or faxed page, together with the published Table documenting ten years of South Whidbey and North Whidbey sales, by residential category.

In the above Table, DOM refers to the number of "days on market", while "percent share" means the percentage of all residential sales. North Whidbey includes the Zip codes for Oak Harbor and Coupeville; South Whidbey is everything south of Coupeville - Langley, Greenbank, Freeland and Clinton. What's going on with home sales? Other than the impressive rise in all residential sales last year, trends are a continuation of events we have discussed over the years. First, North Whidbey is "booming". Absent dramatic personnel changes at NAS Whidbey Island, the greater Oak Harbor area is coming into it's own as a retirement community. Within the past three years the availability and quality of retail goods has increased impressively. Significant mission changes at NAS have many more officers and senior enlisted personnel per squadron than was the case with previous fighter-bomber basing. Salary increases, those following rising education standards and outside business competitive forces, along with rising housing allowances (BAH) have stimulated local new construction to record levels (and record prices). Although rental rates are high, many are unwilling to rent older apartments or the tiny condo units that were built in the past decade. Adding to this Navy impact are the increasing number of retirees who "discover" Whidbey Island, but prefer the small town sense of community in Oak Harbor.

Another factor affecting home buying patterns and new construction is the accumulating impact of the State's Growth Management Act (GMA). Our county is particularly impacted. GMA basically inhibits all development in counties, except within or around "urban" areas. On Whidbey there is only one "urban" area - Oak Harbor. GMA virtually prohibits development everywhere else. Politics have created a vacuum. Oak Harbor has responded. New affordable development land is now so valuable that successful builders are developing for their own account and selling, at their pleasure, some lots to the many eager builders needing ready-to-build parcels. Expect this trend to continue. While "spec" home sales in Oak Harbor rose quite dramatically in both numbers and prices, such sales continue to decline on South Whidbey. Only 21 new "spec" homes were sold on South Whidbey, but some of these were larger, rather expensive homes. The appearance of new homes selling for more than $350,000 is a new phenomenon on the island. Expensive "spec" homes (those above $300,0000) sell very slowly, but they are selling. Custom home construction increased in numbers and average values, even though these do not appear as sales data. Condominium sales continue to decline, as a percentage of the market and manufactured home sales have also declined. Interestingly, average sale values continue to rise, quite independently of changes in transaction activity. Homes under $100,000 have virtually disappeared (even condo sales average almost $103,200 - but most are on North Whidbey). The number of expensive homes sold rises each year. In 2001, 91 homes sold for more than $300,000; and 24 of these sold for more than $450,000. In the next issue of INVESTOR, we will highlight the character and quality of these "fine homes".

ECONOMIC PREDICTIONS FOR FIRST-HALF OF 2002.
Following the horrific events of "911" the national economy, then already five months into a fairly abrupt recession, continues to weaken. Today there is reason to discuss recession, although it is the most unusual recession since statistics have been maintained. Practitioners of Thomas Carlyle's "dismal science" are near their wit's end. Here's the scenario. We're at war, (a very, very real war - everyone needs to accept this reality), and the economic costs of taming terrorism are going to be very high. We also have high consumer confidence, high durable goods sales (near record auto sales), very high new home sales and terrific existing homes sales in most areas of the country, high retail sales (judging from Christmas results) and record employment, all with interest rates that are near 40-year lows. Nonetheless, business spending has collapsed, the sectors of air travel, hospitality and entertainment (all intimately linked) are hurting as never before, stock prices are not supported by current earnings, and there has been an abrupt rise in unemployment, caused by business "re-sizing". The practitioners seem to recognize neither the "disease", nor the "cure". Worse, most of the rest of the world is also in recession and unlikely to recover quickly no matter what happens in the U. S. Your intrepid editors predict that recovery will be slower than many optimists would predict. The short, abrupt recession we are in may already have "bottomed out". However, we do not think there will be a rapid recovery. The "downside" of this is that our politicians may hear the trumpets blaring and effect "cures" that simply create new diseases with dreadful unintended consequences. Here's what we predict for the next six months. The national economy will continue to grow slowly, but remain in the current trough. Inflation is dead. Unemployment will continue to rise. National home sales for existing housing in 2002 will continue well above the 5-million unit level. Other predictions are too dangerous. So much simply depends on unpredictable events. Meanwhile, Whidbey Island remains a great place to live!

POSTSCRIPT. Even ten months after the incredible events of September 11, 2001, changes in our national economy are difficult to predicte until much more time has passed. The immediate effect on Whidbey Island is that almost everyone continues to recover from their "state of shock", but that real estate activity has returned to previous levels. As the forty-fifth week since this foul tragic event passes, we see clear signs of a return to normalcy. As the activities of the Boeing Company at Everett have such large impact on northern Puget Sound, we expect that Boeing employment will drop fairly sharply. Too early to predict what impact this will have on the number of Whidbey real esate sales, possible price changes, or the effect on properties coming on market and their asking prices.

Whidbey Island INVESTOR

Spring 2006

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Spring 2003

Autumn 2002

Spring 2002