CRB FUTURES OUTLOOK

CRB FUTURES OUTLOOK

ALTHOUGH 1990 HOUSING STARTS are expected to match last year's disappointing 1.4 million dwelling units (the lowest since the recession year of 1982), lumber futures prices rallied above $200 per 1,000 board feet for the first time since the summer of 1988 in January, thanks in part to the Northern Spotted Owl.

Lawsuits by environmentalists prevented logging of about 2.5 billion board feet of old growth timber in Pacific Northwest national forests last year. The attempts to have the owl declared an endangered species idled sawmills and resulted in higher prices for framing lumber and boards.However, when the lawsuits threatened the survival of the plaid-shirted lumberjack, Congress passed legislation to sell 6.8 billion board feet of old- growth federal timber in 1990. According to the Commerce Department, the spotted-owl restrictions on logging in Washington, Oregon and California accounted for much of the 4.1 percent decline in sawmill and planning industry employment in 1989. This legislation should be enough to allow an adequate, though still tight, supply of larger-diameter logs for U.S. Pacific Northwest

mills.

Recently, production has been slowed more by unseasonable weather than by the logging restrictions. Canadian S-P-F lumber can be expected to make up for some of the supply tightness, but because dealers are unwilling to build inventories at current interest rates, the potential for a shortfall during the summer construction season remains a supporting factor.

Unfortunately, supply is only half the equation. Lumber prices were depressed until the recent rally because of the sorry state of demand. The median sales price of a new home more than doubled during the 1980s, while per capita income rose only 22 percent. To buy the median-priced new $132,000 home with a loan from a solvent savings and loan institution today, you would have to put 20 percent down (not counting additional cash for closing costs and mortgage points) and finance no more than $105,600. At 10 percent, that is $926.72 a month before taxes and insurance. In short, the average family no longer qualifies to buy the average new home, which become both larger and fancier as the decade progresses. Furthermore, the number of people in the prime home-buying age group - the Baby Boomers - also is peaking, and the economy clearly is past its prime.

The continued weakness displayed in the January data for new home sales and construction contracts argues against a demand-driven recovery in lumber prices once the March contract expires on the 15th.

Nor will remodeling pick up as much of the slack as it did in the late 1960s. Prices of existing homes are flat or declining in the Northeast, condominium and co-op prices are especially soft. Inflation no longer will ail out a homeowner who overdevelops his castle. Besides, unless a new addition is part of the remodeling, the amount of solid wood used may be trivial. Some 10 percent of the PVC consumed in the U.S. each year goes into vinyl siding.

The Western Wood Products Association expects residential remodeling and repairs will account for about 12 billion board feet in 1990, about unchanged

from 1989, while the non-residential repair market will slip to 2.8 billion board feet from 2.9 billion last year. Total 1989 U.S. softwood lumber production was about 37 billion board feet.

Exports, particularly to the Pacific Rim, will take up some of the slack. Under the Super 301 trade negotiations, finished wood products are one of the items Japan has been accused of unfairly keeping out of its market. Bans on exporting unprocessed logs harvested on state-owned lands in the Pacific Northwest also may force Asian importers to switch to buying more finished lumber. However, over the near term, exports will not compensate for a softening domestic market, even if they continue growing at a 24 percent annual rate, as they did in 1989.

Given the economy's continued sluggishness, high interest rates and the softness of the residential real estate market, we expect lumber futures to remain under pressure this spring.