fhe end of fhe lunnel Rerouery mily he in sight

By John Krier JLK Global

the rate of sales as the denominator, the message becomes distorted. If the month's new home inventory figures rise, that does not necessarily mean that actual inventory is rising.

The point is that single family homebuilders have found a level of production that is sustainable. In other words, a bottom. This in turn enables the market (as opposed to individual sawmills) and its "invisible hand" to find a production level that will move prices higher. I am convinced we are seeing evidence of this right now.

[r VERY day I talk to a number of people who are in the I-ttimber business in many different capacities. But the message is always the same: doom and gloom, lamenting, hand wringing, etc.

Those of you who are acquainted with me either personally or through my writing and speaking know that I have been a bear since 2005. Last fall I made a forecast in several speeches of 1.1 million housing starts, even though the "consensus" forecast was 1.4. When the situation deteriorated even further, I changed to 950,000 in my last article for The Merchant (see February, page 11). So I am no Pollyanna. I will match my bearish credentials with all comers. But as with all bear markets, there is a time to move on and look for signs of recovery.

Several weeks ago I saw the first glimmerings in a Wall Street Journal article bearing the unfortunate title "The Housing Crisis is Over." I hasten to say I do not agree with that sentiment. Titles do matter, and a number of my industry colleagues dismissed the ideas in the article. One even made it the subject of his monthly newsletter. But they missed my point.

Buried within the article was a statistic that caught my attention. New home inventories have actually fallen by 100,000 units in real terms over the last nine months. Since the most commonly read headline number is a ratio with

When demand is falling, it is a moving target and calculating levels of production to match it is like "catching a falling knife." As mills reduce and curtail, demand falls again, forcing them into another cycle of rethink and redo. It is not easy to lay people off once, let alone over and over again. But a few months or quarters of stable demand, no matter how low, allows them to catch the knife and target a volume that sells. We have already seen the early indications of this transition in the May-June rally, which is the first in a long, long time to last for weeks as opposed to days.

Does this mean our troubles are over? Of course not. Besides inventories, the overhanging risk is now multifamily. While developers are busily building new apartment complexes, they cannot ignore the danger of the huge volume of existing unsold houses and condominiums that will be reverting to rentals in large numbers over the next few quarters. Rents are already showing some strain and multi-unit builder confidence is falling.

Year-to-date housing figures have been hovering around the I million mark because of a strong multi-family component. These figures will start to drop soon and slide downward for the rest of 2008. As these projects are planned and financed years in advance, the fall will not be precipitous but it will be nasty.

The large banks seem to have muddled their way through the worst of the liquidity crisis, but the local and

(Please turn to page 52)