String str;

A good answer might be:

It declares a variable str that can hold a reference to a String object. However, no object has been created.

An object exists only after it has been constructed. Once it exists, an object is "reached" by going through a reference. Often, the reference is held in a reference variable such as str, above. For example, the following first declares a reference variable, then constructs an object and puts a reference to it in str:

String str;             // declare a reference variable
str = "Hello World" ;   // construct the object and 
                        // save its reference

Of course, it is OK to declare an object reference variable and not place a reference in it (it might only sometimes be needed.) And it is OK to use the same reference variable for different objects at different times:

String str; 
str = "Hello World" ;

. . . .

str = "Good-by" ;                     

QUESTION 2:

(Thought Question: ) What could you do if your program needed to keep track of 1000 different Strings?