A combination of improving economic conditions and an expiring home buyer tax credit produced promising housing reports in April. Housing starts for the month rose to a seasonally adjusted annual rate of 672,000 units, up 5.8% from March and the highest level since October 2008.

The lift came entirely from single-family starts, which jumped 10.2% to 593,000, their strongest showing since August 2008. Total starts were up 40.9% and single-family starts 53.6% from a year earlier, when total housing production was at an all-time low.

It is conceivable that some of the increase in starts in April came from builders rushing to begin and ultimately complete modest homes in time to qualify for the home buyer tax credit.

However, completing these homes by the closing deadline at the end of June requires a tight construction schedule of less than three months, compared to an average five-month process for building a new home.

This would suggest that most of the increase was attributable to rebuilding inventory depleted as a result of the tax credit stimulus.

The building permit data suggest a flattening in construction activity in the near-term. Single-family permits dropped 10.7% from 542,000 in March to 484,000 in April. While this was the first significant decline in a little over a year, it followed a month in which builders were stocking up in preparation for the tax credit expiration.

The  monthly average of single-family permits for March and April were roughly equal to the January-February average and were 16% above the average for all of 2009. As the economy continues to gain traction and employment grows, housing demand will improve and permits will resume their march upward.

Builders’ optimism continued to advance in April as measured by the May NAHB/Wells Fargo Housing Market Index (HMI), which rose three  points from 19 to 22, its second monthly increase in a row. Most heartening was that all three components of the index — current traffic, current sales and expected sales — were also up for the second consecutive month. An NAHB survey of large builders reported similar findings for seasonally adjusted net sales.

Multifamily starts on the other hand were down 18.6% to 79,000 units in April, close to February’s 78,000 starts and down 13.2% from a year earlier. Although month-to-month multifamily starts are subject to statistical anomalies, quarterly averages have shown a continuous decline since mid-2008 and the April figure was 14% below the monthly average for the first quarter 2010.

Multifamily construction continues to struggle against double-digit vacancy rates, high levels of unemployment and the scarcity of financing. Multifamily permits declined 14.7% from 143,000 in March to 122,000 in April, leaving them roughly in line with January and February permits.

Although NAHB is forecasting a slow, but steady revival in multifamily starts over the next several quarters, shortages of both apartments and condos could emerge over the next three to five years, along with higher rents and higher prices, as demand rebounds.

The expiring home buyer tax credit pushed new home sales up 14.8% in April to a seasonally adjusted annual rate of 504,000. This was up from a sales pace of 439,000 in March (revised from 411,000), and represented the best sales in almost two years.

In the process of meeting a rise in housing demand, builders drew down their inventories to 211,000 units, a level not seen since October 1968. Lower inventories together with the higher sales rate reduced the months’ supply of homes for sale from 6.2 months to 5.0 months.

Sales in March and April motivated by the tax credit did undoubtedly steal some demand from future months and some fallback is expected in June and July, and possibly August.

However, the countervailing forces of rising employment, low mortgage rates, pent-up housing demand and the apparent bottoming out of housing prices will allow sales to plateau and prevent them from falling significantly.

Existing home sales in April experienced a similar tax credit induced boost — climbing 7.4% to 5.05 million and reaching their highest level since November — when the 2009 tax credit was scheduled to expire. Existing home sales will continue to benefit from the tax credit through June, when the deadline for closing arrives.

Although various house price measures have been sending somewhat conflicting signals, it appears that house prices nationwide have generally stabilized.

The S&P/Case–Shiller report for March showed a seasonally adjusted price increase for the 10-city index and an increase for nine of the 20 metro areas surveyed; the 10-metro index also showed prices higher than  last March. The 10-city, 20-city and national C-S indexes increased 2% to 3% from their lows one year earlier.

The Federal Housing Finance Agency (FHFA) monthly index also indicated improvement, with prices increasing from February to March at an annual rate of 3%.

On the negative side, the 20-city Case-Shiller index fell at a seasonally adjusted annual rate of 0.6% in March and prices in five cities — Atlanta, Chicago, Detroit, Minneapolis and Charlotte, N.C. — fell at an annualized rate in the double digits. The C-S March index is based on an average of three months when demand did flag during the transition from the 2009 home buyer tax credit to the 2010 version.

The upturn in demand during March and April should show up in improved house price reports in the coming months. Adding to inconclusive signals from the price reports, the March FHFA index was down 2.9% from a year earlier.

April median new home prices fell 9.5% from a year earlier, ending three months of year-over-year increases — $198,400 versus $ 219,200. The drop reflects  a compositional change in the homes that were sold, with more sales at the lower end of the price spectrum; the share of homes sold in April for less than $200,000 rose to 51% from 42% a year earlier.

Meanwhile, despite foreclosed home sales and short sales, April median existing home prices increased 4.5% from a year earlier — $173,400 versus $166,000 — the first year-over-year rise in those prices since July 2006.

Taken together, the various house price measures portray a segmented market that is undergoing adjustment. The conflicting signals are likely to persist over the next few months, but overall, prices appear to have stabilized.

Inflation as measured by the Consumer Price Index (CPI) remains tame. For the first time in over a year, the April seasonally adjusted monthly CPI fell, by 0.1%, though it was up 2.2% from a year earlier. Meanwhile, core inflation — excluding food and energy prices — rose a quite modest 0.9% from a year earlier.

The recent generally upward pressure on the prices of building materials continued in April. Prices for both single-family and multifamily construction rose 0.9% from March, the sixth monthly increase in a row, and 3.9% and 4.1%, respectively, from a year earlier.

Some near-term price relief is likely at hand, with lumber prices recently retreating from their rapid increases and poised for further declines over the next few weeks.

As if multifamily construction didn’t face enough challenges, a proposal moving through Congress would have significant negative effects on the multifamily and commercial real estate sectors.

Under present law, “carried interest” (sometimes known as "promoted interest") from the sale of a capital asset, such as an apartment building or commercial development, is treated as a capital gain and taxed at a 15% rate (20% in 2011).

Carried interest involves an investment structure in which the general partner — typically a developer or home builder — contributes a smaller share of equity to the partnership than the share of capital gain it is due as income. (For example, for a builder who has 10% of equity in the partnership but is due 50% of the gain, the 40 percentage point difference is the carried or promoted interest).

Carried interest arrangements are common in real estate, energy, venture capital, private equity and other enterprises in which the general partner has cash constraints. This is, therefore, an ideal way of allocating risk and reward from the enterprise, while attracting more risk-sensitive limited partners.

Under the congressional proposal, the carry would lose a part of its capital gain character and instead be taxed as ordinary income, with rates up to 35% (39.6% in 2011), plus payroll taxes if they apply.

Under the current proposal, in 2011 and 2012 such income would be treated as 50% ordinary income and 50% capital gain. In 2013 and thereafter, capital gain due to a carry would be treated as 75% ordinary income and 25% capital gain.

The proposal would thus result in a significant tax increase for multifamily and commercial developments. Depending on its final form, the new tax rule could reduce annual multifamily construction activity by thousands of starts. Click here to read a previous NAHB report on the details of this proposal.

The proposal is part of the” tax extenders” legislation (H.R. 4213, which also includes one year extensions of the LIHTC exchange program and the $2,000 new energy efficient home tax credit), which is expected to be subject to a vote in the House on May 28 and receive consideration in the Senate after the Memorial Day Congressional recess.

Votes in both chambers are expected to be close.