Housing starts fell 4.1% in December, according to Commerce Department data, following a big increase the prior month.

On a seasonally adjusted basis, starts declined to 657,000 from 685,000 for November, which was revised slightly. December housing starts rose 24.9% from 526,000 a year earlier.

Analysts polled by Econoday were expecting housing starts to come in at 678,000 with a range of estimates between 625,000 and 720,000.

“The fall in housing starts in December was driven by a steep decline in the often volatile multifamily sector, while starts of single-family homes actually rose slightly,” analysts at Capital Economics said. “In any case, December’s fall reversed only half of the rise in starts in the previous month. With demand set to improve this year, we think that homebuilding is past the low-water mark and will rise modestly in 2012.”

The number of multifamily units completed in December rose 51.5% from the prior month and 47% from the year earlier.

Keefe, Bruyette & Woods said while single-family starts fell, the data are positive “given the better than historical seasonal trend” of a 17% decline.

“New home construction and most housing data remain subdued, although recent data has marginally improved,”  analysts at the investment bank said. “Anecdotal evidence and mortgage purchase application data suggest continued choppy selling conditions and mortgage credit remains a long-term constraint.”

In a joint release, the Census Bureau and Department of Housing and Urban Development said an estimated 583,900 housing units were completed in 2011, which is 10.4% lower than 651,700 in 2010.

Single-family starts rose 4.4% last month to a seasonally adjusted rate of 470,000 units, up from a revised 450,000 for November.

December’s drop in new home construction follows a 9.3% gain the prior month, which was the largest increase since July. Starts dropped 22.5% in February, which was the largest monthly decline since March 1984.

Building permits in December inched up 0.1% to an annual rate of 679,000, up from a slightly revised 680,000 the prior month and rose 7.8% from 630,000 a year earlier.

Mitchell Hochberg with Madden Real Estate Ventures said the report show housing is still in a holding pattern.

“The shadow inventory as a result of foreclosures needs to be resolved and the jobless rate must drop considerably before the sector will see any constructive movement,” according to Hochberg.

Write to Jason Philyaw.

Follow him on Twitter: @jrphilyaw.