Over the past week, shares of iShares S&P Global Timber & Forestry Index (NSDQ: WOOD) have fallen by nearly 5 percent, as the US construction sector has languished over a long winter.

According to data from the Commerce Department, home construction marked its third consecutive month of decline in February as builders broke ground on a seasonally adjusted 907,000 homes. That was 0.2 percent off of January’s reading, a month which saw an 11.2 percent decline of its own, largely thanks to a sharp decline in multifamily construction. Construction of single-family homes rose 0.3 percent in February to 583,000 units, but apartment construction declined by 1.2 percent to 324,000.

While iShares S&P Global Timber & Forestry Index has been declining as though there is some fundamental weakness in the construction market, the real culprit was the weather as revealed by the geographic location of the weakness.

Construction activity actually rebounded across most of the country last month, up 34.5 percent in the Midwest and 7.3 percent in the South, where more than half of home construction occurs. But that was more than offset by a huge 37.5 percent decline in the Northeast last month, a region swept by bitterly cold temperatures and heavy snowfalls. Starts were also off by 5.5 percent in the Western states which, while not yet out of their record-setting draught, were swept by rains in February.

Already there are signs that construction will rebound this month, coinciding with the traditional kickoff of the year’s strongest building season. As you can see from the graph below, applications for building permits surged 7.7 percent in February to 1.02 million units, a four-month high. An extremely reliable indicator of future housing starts, it shows that there should be a sharp pickup in activity in the coming months.





















So while the housing market isn’t where close to the boom the years, it should be on track to continue showing positive growth in both housing starts and sales this year.

There has also been some negative news out of China which has impacted the valuations of timber companies. As a number of municipalities have taken steps to cool the country’s property markets housing credit has tightened, bringing home prices in several key Chinese cities down by as much as 25 percent in recent months.

It has also become clear that Zhejiang Xingrun Real Estate Co., a major Chinese property developer, has gone bust, though that has more to do with poor fiscal management than a housing collapse, because the majority owner and his son have been arrested on charges of illegal fundraising.

Overall, while home sales in China are likely to slow in the coming months, the effect will be a much more sustainable Chinese market. The simple fact is that too many speculators in Chinese real estate had priced a large number of potential home owners out of the market, many of whom will now stand a better chance of finding a property they want at a price they can afford.

Over the longer term, the recent announcement that the Chinese government will take another step towards liberalizing the nation’s banking system by allowing the creation of five entirely private banks with greater autonomy to set rates also bodes well for the market. If private banks are allowed to exist, raise capital as needed within an acceptable regulatory framework and set their own lending rates, housing credit should become easier to obtain on more acceptable terms.

That will continue to propel growth in the Chinese construction market, helping to drive continued demand growth for lumber and other wood products.

Despite the recent volatility, iShares S&P Global Timber & Forestry Index remains a buy up to 55.