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Why Lower Housing Starts in February Should Not Concern Investors

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Apr. 13 2015, Updated 7:06 p.m. ET

Lower housing starts

Previously, we discussed the latest steel production data. Investors in steel companies should also track the trend in steel consumption. Several end industries use steel, but the construction sector is the biggest steel consumer in the United States. Companies like US Steel (X), Commercial Metals Company (CMC), and Nucor (NUE) supply steel products to the construction industry.

The SPDR S&P Metals and Mining ETF (XME) has invested in these companies. Steel Dynamics (STLD) forms 3.7% of the SPDR S&P Metals and Mining ETF (XME).

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Residential real estate spending makes up more than one third of total construction spending, which makes the residential real estate sector a key driver of steel consumption. There are several indicators that investors can track to get a sense of the residential real estate industry. In this part, we’ll analyze the housing starts index. The housing starts index measures the construction of the foundation for a residential home. It’s a leading indicator of the residential real estate industry.

Housing starts rise

The above chart shows the trend in housing starts in the US. The US Census Bureau releases the data on a monthly basis. February housing starts were down 4.1% on a year-over-year (or Y0Y) basis. However, as compared to January, housing starts have declined by more than 17%.

A sign of concern

The decline in housing starts could also be due to severe weather conditions in February. However, the trend in housing starts, though uneven, has been on the upside. There are several other indicators of the housing industry that investors should track in conjunction with housing starts. We’ll discuss these in detail in our next part.

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