Fewer new homes entered the construction pipeline at the end of 2017, further depressing already low inventory levels in many markets. Housing starts across the country dropped 8.2 percent month over month in December to a seasonally adjusted annual rate of 1.19 million units, the Commerce Department reported Thursday.

National Association of Realtors Economist Lawrence Yun called the decline “disappointing,” but expressed optimism for a turnaround.

Despite December’s drop, new-home construction closed out 2017 with a 2.4 percent increase over 2016 and ended the year with 1.2 million extra units. That marks the best homebuilding year since 2007. The single-family sector accounted for the bulk of the increase, rising 8.5 percent year over year. Multifamily starts, meanwhile, dropped 9.8 percent.

“Given that the sales for both new and existing homes sold briskly throughout last year — and at notably higher prices — housing starts should easily surpass 1.3 million in 2018,” Yun said. “Some relaxing of regulatory rules in small-sized community banks will help improve credit conditions for developers. Should more construction come about, the much needed additional inventory will help calm home price appreciation. That would be a good trend for housing affordability, especially in a likely higher mortgage rate environment later this year.”

The National Association of Home Builders is forecasting growth in housing production, buoyed mostly by gains in the single-family sector. The NAHB predicts that single-family production will increase 5 percent in 2018 to 893,000 units. The multifamily sector, on the other hand, will likely continue to face a slowdown of activity. The NAHB forecasts the sector to move 1.6 percent lower in 2018 to 354,000 units.

NAR has been urging home builders to focus on moderately priced homes that cater to first-time buyers.

“The entry-level price point is in dire need of new inventory heading into the spring,” Yun said.

Combined single-family and multifamily housing production dropped the most in the South in December, with a 14.2 percent decrease month over month. The Northeast saw a drop of 4.3 percent, followed by decreases of 2.2 percent and 0.9 percent in the Midwest and West, respectively.

“A return to normal levels of housing production this month is expected after a very strong fall season,” said NAHB Chief Economist Robert Dietz. “We saw a surge of housing activity in the South after hurricane-related delays, and now that region is returning to its positive growth trend.”

Construction permits, a gauge of future production, rose the most in the Northeast in December — 43 percent month over month — followed by an 8.7 percent increase in the Midwest and a 1.7 percent increase in the West. On the other hand, permits fell 11.1 percent month over month in the South, due mostly to a drop in the multifamily sector.