Lumber market seen slumping amid subprime woes

By Karl Plume - Analysis

CHICAGO (Reuters) - The crisis in the subprime mortgage sector is threatening to exert more pressure on slumping Chicago Mercantile Exchange lumber futures, which analysts said will drift lower as long as the U.S. housing market stays slow.

CME lumber futures on Friday were down nearly 30 percent from a year ago and almost 50 percent since their peak in mid-2004 when U.S. housing starts were humming along at a pace of about 2 million units per year. By January 2007 starts had faded to an annual pace of 1.4 million units, the lowest since August 1997, according to the U.S. Commerce Department.

Lumber futures may bounce higher on occasion, but as long as production outstrips demand, the market will stay stuck in a range around current low prices, analysts said.

"The only thing that's going to make lumber move higher is less supply, more demand, or a combination of both," said Ashley Boeckholt, lumber analyst with Bloch Lumber. "You're going to be in a range-bound market at this lower end until you get some fundamental change in supply or demand."

Lumber market weakness stems largely from slow U.S. housing demand, which has tumbled after several red-hot years. Slower home sales have swelled the supply of unsold houses, placing a drag on the economy.

Many market-watchers predicted housing would stabilize this year. Instead, a meltdown in the subprime mortgage sector, which lends to buyers with poor credit at higher interest rates, is threatening to tip the market into a deeper slide.

Subprime represented about one-fifth of new home loans in 2006, according the Mortgage Bankers Association. At least 20 subprime lenders have gone out of business due to rising default rates.

As banks tighten lending standards, some would-be subprime clients may not qualify for loans and some less-risky borrowers may not be able to borrow as much as before, economists said.

HOUSING WEAKNESS FELT IN FUTURES

Lumber analysts said the futures market has, to date, largely priced in the housing market's downturn. But the length and breadth of the housing slump remains unclear.

The number of unsold new homes on the market in January, the latest month for which data are available, stood at a 6.8-month supply at the current sales rate, according to the U.S. Commerce Department.

"The inventory of unsold new homes continues to grow rather than being reduced. I don't think we're anywhere close to bottoming out in the housing sector yet," said Curt Cunningham, a lumber analyst with Pacific Futures Trading.

"If lending standards get tightened on 20 percent of the potential buyers in a market that's already flooded with unsold homes, it's just going to take longer to work off that inventory," he said.

Cash lumber prices have drifted lower in the past few weeks amid ample supplies and a slow start to the spring construction season.

Large, highly efficient sawmills, some of which were expanded to supply the housing boom, have been slow to trim production.