By Laura Kusisto and Ben Leubsdorf

U.S. housing starts hit their highest level in nine years in 2016, but a slowdown in the pace of new apartment building suggests that it may be difficult for construction to hit new highs this year without a strong rebound in single-family home building.

Housing starts rose 11.3% in December to a seasonally adjusted annual rate of 1.23 million, the Commerce Department said Thursday. Permits, an indication of how much construction is in the pipeline, were down 0.2% to 1.21 million.

Economists surveyed by The Wall Street Journal expected starts to rise 10.1% in the final month of 2016 to 1.2 million and building permits to rise 2.5% to 1.24million. Construction typically begins a month or two after a permit is issued.

The rise in starts follows a drop in activity in November, when new starts dropped by a revised 16.5%. The drop was largely propelled by a 38.7% drop in the construction of buildings with two or more units, which includes apartments and condos.

Single-family housing starts dropped 4% in December while multifamily rebounded 53.9% from a month earlier.

Monthly housing figures are choppy, have a significant margin of error and can be subject to large revisions.

An estimated 1.17 million housing units were started in 2016, nearly 5% more than were started in 2015 -- making it the strongest year since 2007. But that rise masked a sharp divergence in the types of residential construction under way. Single-family starts were up 9.3% last year, but construction of buildings with five or more units fell 3.1%. A similar pattern was seen in the permits data.

New home construction has been the weakest element of the overall housing recovery. Home prices have already surpassed their previous highs and apartment rents have climbed more than 26% since early 2010.

The strength of multifamily housing construction has helped buoy housing-start numbers, even as single-family activity remains well below normal levels.

"When you look at single-family [construction] we're still at recession levels, which is quite remarkable because historically the real-estate cycle leads the business cycle," said Sam Khater, deputy chief economist at CoreLogic Inc., a housing data firm.

The numbers look particularly bleak when accounting for population growth. The number of single-family and multifamily starts per 1,000 households remains about 38% below the 50-year average, according to Ralph McLaughlin, chief economist at housing website Trulia.

The factors holding back builders range froma shortage of laborers, difficulty finding land in desirable locations and regulatory barriers that drive up the cost of a new home beyond what most consumers can afford.

Economists are optimistic that single-family housing starts will continue to improve in 2017, as rising wages and a move by younger households toward homeownership help drive up demand. Republicans have pledged to peel back environmental regulations and Donald Trump has promised tax cuts and infrastructure spending that could help extend the economic recovery.

"I am cautiously optimistic that 2017 is going to be an even better year and I hope it is for the sake home buyers," Mr. McLaughlin said.

U.S. builders remain highly confident about the market for newly built single-family homes, but their optimism slipped in January from the highest level in more than a decade the prior month, the National Association of Home Builders said Wednesday. The trade group'shousing-market index fell to 67 in January from 69 in December.

Still, even if single-family housing starts rebound, the overall numbers could be weighed down by a pullback in multifamily starts. Landlords are bracing for a flood of apartment-building completions that is dragging down rents and making leasing up new buildings a slog. As a result, lenders are pulling back on apartment-construction loans.

Write to Laura Kusisto at laura.kusisto@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com

(END) Dow Jones Newswires

January 19, 2017 09:40 ET (14:40 GMT)

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