How do you get it to keep its shape??
I really don't know about the lanolin. I know that there are some treatments for birds that do include lanolin but on the other hand you'd think that an animal based product might deter them from using the nest. If you decide to test this out, you could let us know if birds still used the birdhouse!
Wonder if you could needle felt on a roof for over the hole to help prevent water getting into the bird house?
The thing that confuses me about this is felted wool seems to both repel and absorb water - those Shamwow and similar cloths are just wool felt. You have to soak such cloths before using them - so would that mean that initially the birdhouse would repel water but then it would start absorbing it?