No quick answer for slump in lumber

KANSAS CITY, Kan. Next year is expected to be a long, hard year for lumber producers and dealers amid predictions that the home-building slump may not bottom out until the fourth quarter.

An actual rebound in new home sales likely will wait until 2009, according to the National Association of Realtors. In a paper dated Dec. 10, NAR Chief Economist Lawrence Yun said existing home sales are projected to trend slightly higher in 2008.

After problems with sub-prime mortgages began to show up earlier this year, troubles with other mortgages and house valuations followed, leading to a year of mortgage-rate problems. House values declined, foreclosures increased, home sales fell, housing starts plummeted and lumber prices fell to levels well below profitable levels for the mills.

The result has been protracted losses at North American lumber mills, especially those in Canada that sell most of their production into the United States in U.S. funds. A weakening U.S. dollar meant producers got less for their products, crimping the bottom line for the mills.

Even U.S. government intervention to slow the rate of foreclosures may not be enough to actually reverse the trend until late next year, market analysts said.

November foreclosures were down 10 percentage points in November from October, according to RealtyTrac, a mortgage research company. However, they were up 68 percent nationwide from a year earlier, RealtyTrac said.

One lumber market analyst said even if the rate of foreclosures declines before the fourth quarter, the uncertainty surrounding pending foreclosures may keep housing and lumber markets on edge for a while. Only a series of well-publicized reports indicating an end to the housing slump would turn investors into buyers of lumber, houses or even home-builder stock, he said.

A point that market analysts make is that the housing market will need to begin drawing down its inventory of unsold existing and new houses before a serious recovery can take place. An unknown among most is just how the foreclosed houses are affecting the overall number of existing homes already put up for sale.

Walter Malony, NAR senior public affairs associate, involved with industry trends, research studies and reports, said many foreclosures don’t end up with a Realtor’s “For sale” sign out front. Many are auctioned to clear the bank’s books.

There is no data to identify the number of foreclosures, Malony said, but the NAR sees the number being only a small percentage of the total inventory of existing houses for sale. NAR economists project about 200,000 foreclosures in 2008, compared with the current total of about 4.5 million houses for sale in the U.S., he said.

Brian Leonard, Chicago Mercantile Exchange floor trader and lumber market analyst for Rosenthal-Collins Group LLC, said the current, unprecedented rate of lumber mill production cuts could lead to tightening supplies, even at the current residual rate of consumption.

The current production cuts could lead to a gradual tightening of lumber stockpiles at mills, wholesalers and distribution yards, and Leonard said this could lead to a short-term rally in prices in the next few weeks that could stretch into January.

However, after that, the market may fade again as buyers pull away from the higher quotes, Leonard said. The market could see another seasonal price rally into the spring as just-in-time buyers fill orders for new houses and for remodeling demand.