By Ian Sherr

CHICAGO (Reuters) – ANALYSIS – When the U.S. housing market was booming earlier this decade, lumber prices were too. When the housing market went into a slump so, too, did lumber.

Now, with nascent signs of a housing recovery, it’s natural to assume lumber prices will follow suit.

But experts say that it may be years before lumber recovers in any substantive way, thanks mostly to conservative production mixed with unpredictable demand.

Of course, no one’s claiming the housing market is really heating up, but new data just released by the widely watched Case-Shiller home price index showed a bump in new home sales for the third straight month in May, with the price of homes rising for the first time in nearly three years.

That’s good news to Robert Bernhardt, Jr. of the Western Wood Products Association, who said those new home sales are tied to the lumber industry: 45 percent of lumber is used in new home construction and 30 percent is used in home remodeling.

But, he warned, it’s only a little bit of good news considering how bad things have been. And, although new home sales are up, building is still far down.

“There is a sense that we are at the bottom, but you have to keep in mind that it’s a pretty dark deep hole that we’re in,” he said, citing a prediction from March that the country would start building 432,000 new homes this year. In 2005, that number was closer to 2 million. “This is a fundamental shift.”

And with new-home production down to levels not seen since 1945, he isn’t optimistic

“No one expects things to get back to 2005 levels for a long, long time,” Bernhardt said, adding that he doesn’t expect the U.S. to be building a million homes per year until 2012.

Paul Quinn of RBC Capital Markets is more optimistic, expecting the U.S. to hit that milestone in 2010. But he realizes that he’s just one of many, citing another forecast for half as many new home starts in 2010 as his.

“It’s really all over the map,” he said.

LEADING LOSSES

Lumber companies are still seeing losses, even as prices have begun to rise in the midst of production cuts.

Both of North America’s largest lumber producers, West Fraser Timber Co Ltd (WFT.TO) and Tembec Inc (TMB.TO), reported quarterly losses within the last month, citing, among other things, the impact of foreign exchange.

And over the last week, the Canadian dollar has hit a 9-month high, which makes lumber more expensive in the United States, creating even less incentive for people to buy.

CRYSTAL BALLS AND WOODEN PLANKS

Further complicating matters in Chicago’s lumber futures market — where speculators and home builders buy tomorrow’s lumber at today’s price — is that a bump in prices due to supply cuts will not create long-term growth in the same way that increased demand would.

“It’s hard because you never see that until after the actual turn,” said Bloch Lumber Vice President of Sales Ashley Boeckholt, adding that the indicator of true demand and recovery will be sustained higher prices.

“A $30 move up off of a bottom looks a lot higher than it is,” he said, citing lumber prices which closed at the Chicago Mercantile Exchange at $196 per thousand board feet on Wednesday, up from $172 a week ago.

This time last year lumber was $262. In 2005, it was $322, down from the mid-$400s a year prior.

With production reduced to nearly 50 percent, lumber pricing is volatile — pushed and pulled by supply announcements and production cuts, said RBC Capital Markets’ Quinn.

“Prices are being affected by supply rather than demand,” he said, adding it will remain that way “until demand picks up to a decent level.”

He added, “My feeling is that the market bottomed in the first quarter, and is slowly — slowly — recovering.”

(Editing by Christian Wiessner)

(Originally published July 30, 2009 on the wire at Reuters News, here.)