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Check out our new website at www.reidwright.com, where you can: o View our complete product line. o Request a quote on line, any time, any day. o Take advantage of our 0nline Specials. Free on-line software for deck building. rnHE U.S. housing sector is in its |- worst downturn in more than 50 years. With five months of data in, single-family housing starts are poised to average just 370,000 units at a seasonally adjusted annualized rate (SAAR) in the first half of 2009.

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This is far and away the lowest level in the 59-year history of the series. The question now is, are we likely to stay at these levels and if so, for how long?

Most forecasters believe starts will remain at or below this level. In fact consensus forecasts imply single-family starts of 350,000 units through most of 2010! According to our North American Lumber Forecast (www. risiinfo.com/wtforecasts), this is much too low. Why is that? One need only look at new home inventories to understand why.

Actual inventory of new singlefamily homes for sale have been declining for several years now. In fact, inventories fell to 292000 units in May. At the current sales pace, this is just over a l0-months supply, too high to encourage builders to ramp up construction. However, inventories will almost certainly continue to fall over the next six months, with the months supply likely to hit seven months by year-end, a level at which builders will begin to ramp up production.

We are quite certain inventories of unsold new single-family homes will continue to fall over the next six months for several reasons.

First, new home sales stabilized in the first half of 2009 around 340,000 units per months (SAAR). Moreover, they increased in April and would have increased in May except it was an unusually short month (typically May has 22 workdays; there were 20 in 2009). With affordability improving (year-over-year new home prices are off lTVo and mortgage interest rates are down more than 100 basis points), we conservatively expect new single-family home sales will average 360,000 units over the next six months.

Second, because it takes six to seven months to complete a home from the time it is started, we know how many single-family homes are going to be completed in the second half of this year-around 370000 at a seasonally adjusted annual rate. Now, with 360900 homes being sold (again at a seasonally adjusted annual rate), you might think inventories should actually be increasing.

However, not all the home started are built for sale. In fact only about 65Vo of the starts in recent quarters were for sale. The rest were built by or for the owner and don't go into inventory. So, of the 370,000 homes that will be completed in the second half of this year, only about 240,000

(SAAR) will go into inventory and 360.000 will be sold.

With seven months left in the year, this means inventories will be drawndown by 70,000 units, leaving us with 222900 units of inventory. At a sales pace of 360,000, this is the equivalent ofjust over seven months supply.

Once the month supply of new homes gets down to this level, we believe builders will begin to increase single-family home production. While they certainly won't jack production back up to 1.0 million units, we would expect them to work towards stabilizing the inventory of unsold homes. At an annualized sales pace of 360,000, builders would need to produce 550,000 single-family homes (assuming 35Vo of the homes are built by/for an owner) to stabilize inventories.

So, even if the RISI forecast for single-family housing starts proves overly optimistic (reaching 700,0000 units at year-end), the consensus that single-family housing starts will stay in the low 300,000 unit range (SAAR) through the end of this year is certainly too pessimistic.

- Paul Jannke is senior v.p. ttf wood & timber information for RISI, a leading information provider for the global forest products industy and publisher o/Crow's Market & Price Service, which offers free trial subscriptions at www.risiinfo.coml crows. Reach Mr. Jannke at pjannke@ risiinfo.com.