Home builders’ confidence in the housing market, already dismal at the beginning of 2008, ended the year at a record low.

Pessimism in the industry is the worst it’s been in at least 20 years, states the most recent survey by the National Association of Home Builders.

“While builders are doing everything we can in the way of price and non-price incentives to move new homes off the books, buyers are afraid to move forward,” said Sandy Dunn, chairman of the group.

“And in any case there is almost no way to compete with the cut-rate product that is continually flooding the market from mounting foreclosures,” he said.

The association uses the builder survey to calculate a housing market index: If the index number is above 50, that portends a positive housing outlook among builders; a lower number indicates a gloomier view.

The index finished off 2008 at 9 points. To compare, the index topped 70 points during the most recent peak in mid-2005.

When builders are this pessimistic about the prospect of selling new homes, they aren’t usually very productive.

Between 2005 and 2008, housing starts fell 55 percent to an estimated 930,000 homes, according to the Western Wood Products Association.

Given the depressed attitude among builders, the number is expected to drop again this year, to about 800,000 starts, said Butch Bernhardt, the association’s director of information services.

“There’s not a lot of incentive to be building a new house,” he said.

Not surprisingly, the demand for lumber is down and sawmills are sharply curtailing production.

In 2009, mills are expected to generate about 35 billion board feet of lumber, said Bernhardt. That’s 15 percent lower than 2008 and 45 percent below 2005, he said.

To put that in perspective, it’s as if the entire lumber production of the Western U.S. was wiped out in three years, he said.

“This is the worst downturn in history in volume of consumption in the timber industry,” Bernhardt said.

The price for dimensional lumber has tanked, falling by 50 percent in the past four years to about $220 per thousand board feet (MBF), according to a composite from the Random Lengths forest products information service.

Adjusted for inflation, lumber prices are now near an all-time low, Bernhardt said.

The futures price for lumber – which is calculated differently than the Random Lengths composite price – were at $177 per MBF for this month and $220 per MBF for January 2010, according to the Chicago Mercantile Exchange.

Forest industry consultant Paul Ehinger said that reflects pessimism about the current housing market, not optimism about the future.

“No one really has any experience to guide them about what is going to happen,” he said.

In any case, it’s unlikely that the price can continue plunging any further, since many sawmills are already selling lumber below the cost of production, said Ehinger.

“You can’t keep going down, down, down. We’ve already gone further than expected,” he said. “There isn’t much further the price can fall. We’re just about as bad off as the auto business is, except we’re not big enough that anyone notices.”

In the past two decades, the number of mills in the Western U.S. has shrunk from about 700 to fewer than 200, and in light of the current downturn – already in its third year – even more companies likely will close for good, Bernhardt said.

Even when the housing market eventually does improve, it may take six months or longer for the upturn to affect the timber and lumber industries, he said.

“The recovery is going to come slow,” Bernhardt said.