U.S. lumber 2008 outlook dim as housing woes persist

CHICAGO (Reuters) - The deepening crisis in the U.S. housing market and a credit crunch will keep lumber prices in the United States under pressure well into 2008, with values already near the lowest levels in 15 years.

Most analysts do not expect what has been called the worst U.S. housing slump since World War II to bottom out until at least mid-2008. Once a bottom is reached in housing, lumber demand could still remain dull for months.

"You've got very weak demand and just a pile of inventory (of homes on the market) to get through before you can get demand for the underlying lumber to pick up down the road," said Paul Quinn, a paper and forest products analyst at Vancouver-based Salman Partners. "That's why 2008 is going to be very similar to 2007."

Lumber prices have eroded this year in tandem with slowing demand from home builders and it is difficult to gauge how far prices will fall with no end in sight for the housing slump.

Wave after wave of negative news from the housing sector indicate demand will keep eroding in the foreseeable future.

Near-record supplies of unsold homes were currently on the market while many prospective buyers have stayed on the sidelines as average home prices have slipped lower and lower.

Meanwhile, tightening mortgage lending standards have shut out some buyers and made it very difficult for those with resetting adjustable rate mortgages to refinance. As a result, foreclosures have nearly doubled from a year ago and experts believe foreclosure rates will continue to climb, putting more homes on the market as banks liquidate them.

RECORD LOWS POSSIBLE

Spot lumber futures at the Chicago Mercantile Exchange tumbled nearly 30 percent from July to October as the housing crisis deepened, but have since recovered somewhat.

The closely watched western spruce-pine-fir cash price fell to around $220 per thousand board feet in late October which, when adjusted for inflation, was the lowest price on record.

Cash prices should challenge that historic low and may fall below $200 once mills restart seasonally curtailed production after the holidays and output ramps up at many northern mills next spring.

Spring is traditionally one of the strongest demand periods for lumber as builders bulk up lumber inventories and construction accelerates following the winter layoff. But all signs point to a lackluster construction season in 2008.

"The sentiment in the building community does not indicate that we're going to have a brisk spring at all," said Curt Cunningham, president of Pacific Futures Trading.

"Builders will be very defensive. There's still lots of unsold inventory and building permits and forward looking numbers like pending home sales don't indicate that builders are the least bit optimistic," he said, citing industry data that has put builder confidence near the lowest rate ever.

U.S. housing starts as of October were running at a 1.229 million-unit annual pace, near a 14-year low and down more than 16 percent from a year ago, the U.S. Commerce Department said.

"With the backlog of unsold homes and the current crisis in the mortgage and financial markets, I don't see any reason housing starts couldn't go to 800,000," Cunningham said, echoing a growing number of industry watchers that expect little upside in the near-term.

Meanwhile, sawmills continue to churn out enough wood for starts "somewhere between 1.3 and 1.4 million," Quinn said.

Lumber industry analysts expect the tough market conditions to force more and more mills to pare production or shut down completely, especially at Canadian mills where losses have been more pronounced due to a historically weak U.S. dollar.

"The size of the Canadian forest products industry is going to shrink measurably as long as the Canadian dollar stays above par. It just cannot handle that," Quinn said.

"The long term fundamentals of the industry are good, it's just that this next year or year-and-a-half is going to be particularly traumatic for the industry," he said.

(Reporting by Karl Plume; Editing by Marguerita Choy)