The lumber industry, with dozens of mills shutting down every week and thousands of workers losing their jobs, is being devastated by the slump in home building.

One million construction workers are expected to be laid off by the end of the year.

Savings and loan associations, mortgage insurance firms and title companies are dismissing employes for lack of work.

And waiting lists for public housing projects in Washington have swelled dramatically with poor people who have no place else to live.

From lumber mills to furniture makers, from lawyers to moving firms, from carpenters to drywall contractors and, ultimately, for anyone who dreams of buying a house, high interest rates and scarce mortgage money are unleashing a broadening wave of anguish through the area and the nation.

"There is a ripple effect that hits the people who make carpeting, wallpaper, furniture, silverware, draperies, even the guy in Michigan who makes spare parts for a heat pump," said William F. Sinclair, president of Perpetual American Savings and Loan Association, the area's largest mortgage company. "The housing industry affects 23 percent of the U.S. economy. You're damned right we're crying the blues."

Nowhere has this ripple effect hit with more force than in the lumber industry. Veteran lumbermen in Virginia, where forest products generate $2.8 billion a year and create employment for 80,000 workers -- making it one of the largest private sources of employment in the state -- say they see only hard times for at least another year.

"We trimmed back to three days' work six weeks ago," said Mac Butler, manager of the Butler Lumber Co. in Chase City in southern Virginia. "We normally employ about 200 workers, but we've had to let about 100 go. My father started this business 45 years ago and this is the worst I can remember."

A lumber industry leader, A. Milton Whiting, president of the National Forest Products Association, recently told President Reagan in a letter that "a sizable portion of the lumber industry is approaching extinction. This is the most serious crisis our industry has faced in nearly 50 years."

And one of Reagan's closest allies in the industry, Peter Murphy, who is being considered for appointment as ambassador to Ireland, said his own lumber company in Portland, Ore., has been on a four-day schedule for the last six weeks and has laid off 60 workers.

A number of lumber companies throughout the Pacific Northwest have closed down, and the impact on the small towns that rely on them was "just as though a light had been switched off," Murphy said. "There's no doubt that the industry is in dire straits, and it's all due to high interest rates."

Murphy said, however, that he had great faith that the administration's economic policies would soon produce "a major improvement, in which rates will be in a steady down pattern in the next five to six months. When we get mortgage rates back to the 11 1/2- to 13-percent bracket, people will be able to buy houses again -- and they will buy."

But many people in other businesses linked both directly and indirectly to the ailing housing industry are far less confident. In fact, some bankers say that the limited number of loans still being made is intended mainly to save both lenders and borrowers from a wave of costly foreclosures.

"We're still seeing some 'forced' mortgage activity because loans are being made below market rate," said Thomas J. Owen, Perpetual American's chairman. "This is being done because a developer may be in jeopardy of bankruptcy and it's not in the lending institution's interest to let this happen," he said. "But once the product is off the shelves, the number of loans will drop dramatically."

The consequences are most keenly felt among those who swing the hammers and lay the bricks. In the first five months of this year, 4,000 local construction workers lost their jobs, the Metropolitan Washington Council of Governments reports. While union officials here say their members are being kept busy by the booming office-building market, it is the nonunion workers who are bearing the brunt.

"It's cut my work in half," said David Kreh, a drywall contractor in Silver Spring. "All my builders are just sitting there and they aren't building any more. I can see the writing on the wall. In another month we're going to be in big trouble."

"It's really taken its bite on us, too," said Gene Cornett, who has cut the crew of his Rockville excavation firm from 24 to 10. "We get a contract for 25 houses and they build three or four at a time. It's really a panic right now."

"Everyone I talk to says they can't last much longer," said Gary Balsamo, president of Built-Rite Builders, a small firm in Rockville. "We hold an open house and maybe one or two people come out. If this thing doesn't turn around within the next six months, I can't make it."

"Obviously if nobody's buying houses, we're not going to be moving anyone into them," added Bernie Secrist, vice president of Beltway Movers Associates.

Some have already lost their jobs. Jack Eye, 26, was let go by AC&R Insulation Co. last week, and this time it's expected to last far longer than the week-long layoffs of the past. "They don't even know when I'll be able to go back to work," the four-year veteran said. "They said the next time I come in there, some other people might be laid off, too.

"No other insulation companies are hiring, and I've got bills for rent and food," said Eye, who lives in Landover Hills. "I'll have to look for another kind of job. I just had an interview for a warehouse job with Safeway."

Even lawyers haven't been immune. Berneice Naylor at Attorneys Title Corp. in D.C. said the firm is currently handling 318 title searches, compared with 510 at this time last year. What's more, Naylor said, the firm just laid off two employes and is wasting "many, many hours" on title searches for buyers who ultimately don't qualify for financing -- which means the firm doesn't get paid.

It would be difficult to overstate the importance of housing to the financial markets. Perhaps no other business, except automobile manufacturing, can send tremors into so many segments of the economy when interest rates become volatile. For example, the Federal National Mortgage Association (Fannie Mae), which buys billions of dollars worth of mortgages from lenders and sells debt obligations to private investors, is the nation's second largest borrower, after the U.S. Treasury.

Ticor Mortgage Insurance Co. of D.C., a firm that insures mortgages in which the downpayment is 20 percent or less, also is feeling the strain. The sky-high interest rates have forced most home buyers to make larger downpayments so they can qualify for smaller loans -- and that means fewer mortgages for Ticor to insure.

"It's kind of tough for me because I work mainly on commission," said Kathy Stemler, an account executive with the firm. "My business is down about 50 percent, and in the next few months it'll be down even more." This, in turn, has complicated her carefully devised plan to buy a $101,500 two-bedroom condominium in Arlington.

With sales plunging, the demand for other kinds of housing is increasing at a time when the federal government is sharply curtailing its traditional role in the market. This has produced the most severe strain in a generation on harried tenants, private landlords and local government officials.

"We're renting everything we can get our hands on," said P. Wesley Foster, president of the Long and Foster realty firm. "We're hardly running any ads. We don't have to."

John T. O'Neill, vice president of the Apartment and Office Building Association here, said the declining availability of rental units, particularly those in lower price ranges, means that "rental housing is on a path toward extinction."

Virtually no privately financed rental housing has been built in the metropolitan area for several years, O'Neill said. "The most critical shortfall is in rental housing for senior citizens and for lower-income families with several children," he said.

Federal Housing Commissioner Philip D. Winn said there are no financial incentives for private developers to build rental apartments. "When interest rates get this high, the housing industry gets it in the neck," he said. "You can't expect to have any multifamily construction with these rates, absolutely not. The numbers just can't be made to fit."

By next year, Winn said, the federal government will no longer subsidize the construction of rental housing for low- and moderate-income families. Nevertheless, he said, "I'm not concerned about how we're going to house America in the next 10 years. That will be up to the states, the cities and the private sector."

Many of the Washington area's poorest residents, who can neither afford to buy nor to rent without government help, have turned to public housing, where nearly one of every 10 D.C. residents already lives.

D.C. Housing Director Robert Moore said the number of new applicants jumped from 1,297 in the first eight months of 1980 to 1,881 for the same period this year, a 45 percent increase. Moore's staff, meanwhile, is interviewing people who first applied for three-bedroom apartments in January 1974.

The waiting lists for public housing and rental subsidies also have swelled in Alexandria. And in affluent Montgomery County, 9,500 families are now waiting for such assistance, up from 6,000 last year. But federal officials say they plan to abolish the rental subsidies next year, a budget-slashing move that will cost D.C. alone $30 million a year.

Perhaps the most dramatic impact has been on the city's highly touted program to renovate boarded-up homes and sell them to people making less than $25,000. Soaring interest rates have eliminated nearly all the potential buyers, and only 40 percent of the 200 houses renovated so far are now occupied.

"Many of these houses are sitting unsold and some have had their windows broken and their furniture stolen," Moore said. "We had contracts on all 200 homes -- in some cases with backup buyers five deep -- but people are no longer qualifying at 16, 17 and 18 percent interest rates . We've had people come in and tear up their contracts."

In an effort to salvage the city's investment, Moore is now forced to subsidize these purchasers by "buying down" their interest rate, a method that requires the city to come up with more cash at settlement. After fixing up a house with a $40,000 mortgage, the city government must pay another $3,600 to in effect reduce the interest rate by 3 percent. But even that approach is no longer working.

"When I was buying the rate down to 14 percent, I was able to close on some houses," Moore said. "Now that the rate is 19 1/2 percent, I'm buying it down to 16 1/2 percent, but I'm not selling. People just can't qualify."

Rhea de Arce, 44, a dental assistant who rents an apartment in the Mount Pleasant area, had been waiting 2 1/2 years to buy one of the city's renovated $37,000 condominium apartments on Harvard Street NW. She lives with her 7-year-old daughter and was so intent on buying a unit that she went to dozens of neighborhood meetings to organize support for the project.

"They were supposed to be completed last December, then they said January, and then August," de Arce said. "By then, I couldn't afford it. When interest rates started going up so high, I just sat back and didn't bother any more. Being divorced and with a daughter, I just couldn't put myself out on a limb."

High interest rates also have prompted most local officials to hold off on selling millions of dollars in tax-exempt bonds to provide low-interest mortgages. In Montgomery County, officials found that a new bond sale would only aid home buyers making more than $35,000 and they're debating whether to subsidize people in that income bracket.

Prince George's County faces a similar dilemma. The county had hoped to sell $45 million in bonds to encourage people to buy condominium apartments by offering them 12 percent mortgages. "But now the interest rate would be more like 14 percent and we're not sure we would be assisting all that many people," said housing director Earl Morgan.

Even tenant groups, which until recently were cashing in on the condominium boom, are falling on hard times. Three years ago, the residents of Ordway Gardens in Northwest Washington won widespread attention when they became the first tenant group in the city to convert their apartment project.

But as interest rates soared along with the cost of renovation, only half the tenants bought apartments in the 122-unit complex. Last winter they had to bring in an outside firm to try to sell the rest. An executive at the J.E. Robert Company said the firm expected to sell all the apartments by July, but there are still 40 left and buyer interest is way down.

The refurbished units, which range in price from $80,000 to $142,000, are just a block from the new Metro station in Cleveland Park. But sales have been so sluggish that the Robert firm has had to buy down the interest rate from 19 1/2 percent to 16 1/2 for the first three years of the mortgage.

"We had absolutely no choice if we want to bail the tenants out of the bind they're in," said Hank Livelsberger, the firm's vice president. "The interest clock is ticking each month."