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Canadian lumber producers won't quickly profit from surging U.S. new home sales

Surging U.S. new home sales are early signs of an economic recovery, but Canadian lumber and building products producers hoping to profit from gains will likely have to wait until spring for inventories of existing homes in the United States to fall, an analyst said Wednesday.

"I think it will get there eventually," Paul Quinn of RBC Dominion Securities said in an interview.

But July's 9.6-per-cent increase in new home sales is not the kick-start that will help bolster the Canadian forestry industry, he said.

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"New homes are at quite a low level so it's not driving up demand and we've got more than enough supply to meet that demand."

New home sales beat expectations as they rose for the fourth straight month to the highest point since September. The string of gains hasn't happened in five years.

The U.S. Commerce Department said sales rose to a seasonally adjusted annual rate of 433,000, up from 395,000 in June's revised numbers. That's 32 per cent above January's record low but still 69 per cent from the peak.

Sales growth was greatest in the U.S. northeast, increasing more than 32 per cent. However, the south accounted for more than half of total units sold. The midwest continued to face challenges, decreasing 7.6 per cent.

Demand for Canadian lumber won't meaningfully accelerate until the 4.1 million existing homes, or 9.4 months of supply, are whittled down, Quinn noted.

And even if demand increases, Canadian shipments are still limited under a 2006 Canada-U.S. softwood lumber agreement that ended the latest lumber trade fight launched by the U.S. wood products industry. Meanwhile, a strong Canadian dollar could also continue to squeeze the Canadian industry, which has lost sales because a high loonie makes the wood they can ship into the U.S. more expensive for customers such as U.S. home builders and home renovation companies such as Home Depot and Lowe's.

Mr. Quinn said investors expect lumber prices will continue to fall as futures for September are $180 (U.S.) per thousand board feet, representing a discount from current cash prices of $195.

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"I think the outlook is for the fourth quarter to be very quiet and the first quarter to be quiet as well," Mr. Quinn said.

The situation could become more interesting come spring, however, if efforts to constrain production during the winter season result in higher lumber prices.

Domtar spokesman Pascal Bosse said while home sales are trending better, housing starts are still very far from what's needed for his company and other producers.

"In the first half of the year, we operated at little over 50 per cent of our capacity and this number is not likely to go up any time soon," he said in an e-mail.

BMO economist Jennifer Lee said the higher new home sales figure "is another encouraging sign that U.S. housing is finally on the mend."

"It's been a long time since I used the words 'smashed' and 'surging' in the same sentence to describe the U.S. housing market and I must say it feels good," she wrote in a report.

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Ms. Lee said items supporting a recovery are working in tandem. They include a first-time home buyer tax credit expiring the end of November that covers 10 per cent of the purchase price up to $8,000, high affordability, low mortgage rates and concerns that house prices have bottomed.

The median sales price was $210,100 in July. That's off 11.5 per cent from year-ago levels and down slightly from $221,400 in June.

Builders and real estate agents are pressing Congress for the credit to be extended. There is concern that the upward trend could reverse if an extension isn't approved.

Each new home built creates, on average, the equivalent of three American jobs lasting one year and generates about $90,000 in taxes paid to local and federal authorities, according to the U.S. National Association of Home Builders.

In Canada, an eventual increase in demand for lumber would also help to revive an ailing forestry industry that has suffered sawmill closings and layoffs for thousands of workers.

Shares of forestry companies with a lot of exposure to new home sales as leading suppliers of oriented strand board increased in Wednesday trading on the stock exchange. Norbord closed up 12.66 per cent to $1.78 and Louisiana Pacific increased 4.12 per cent to $7.58.

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