September housing starts came in 9 percent below August and 12 percent below September 2015, according to the U.S. Census, but those big drops belie a huge improvement for the market, at least in this monthly read.

Those numbers are totals, based on both single-family homes, which are desperately needed, and multifamily apartments, which have seen a construction boom over the last three years.

The drop in housing starts was driven entirely by a big swing lower in multifamily construction. That may be a one-month phenomenon, because numbers on multifamily can be swayed dramatically by just a few large-scale apartment developments.

"Bottom line, the bizarre plunge in multifamily starts is inexplicable but the rise in permits says it was an outlier," said Peter Boockvar, chief market analyst with the Lindsey Group.

Whatever the case, the apartment market is starting to cool slightly, as thousands of brand new, albeit mostly luxury, units come on line and occupancies start to level off from their climb to historic highs. Construction reached a cyclical high last year and is only moderating slightly this year.

Single-family home construction, which is what the housing market desperately needs, rose 8 percent for the month and 5 percent from a year ago. That is a positive for a sector that has been wildly conservative following the worst crash in history.

"Owner occupied housing demand continues to rise, but lack of supply is holding back both new and existing home sales," said David Berson, chief economist at Nationwide. "While they are up, they would be up by more if more supply was available."

Single-family home construction rose by its quickest pace since February but is still only about 75 percent of the way back to historically normal levels. Given the extreme pent-up demand for housing, builders still have a long runway ahead. Unfortunately, the permit numbers for single-family were flat, which indicates there will be no surge in construction in the coming months.

While sentiment among the nation's homebuilders slipped in October, investors should not see these companies as necessarily back in a bad place. The nation's big public homebuilders have both consolidated with each other and eaten up several small and mid-sized private builders. However, they are still being quite conservative, despite their solid financials and land positions.

"The publicly traded home builders have shown tremendous discipline this cycle, building fortressed balance sheets while growing the business steadily," wrote Alex Wilson, research analyst with John Burns Real Estate Consulting. "In conclusion, the publicly traded home builders as an industry are in great financial shape — both poised for growth and prepared for a downturn. Most expect the industry to continue to grow slowly but are prepared to react no matter what happens. Pretty nice situation to be in!"

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