“We expect the builder equities will react positively initially, but then fade through the day once the report is fully digested as ‘multifamily’ was the key driver of the results,” warned Stephen East at ISI.

There is no question that home builders are benefiting from tight supply in the existing home market and overall improved consumer confidence. That was apparent in the home builder confidence numbers released this week, which hit the highest level in six years. (Read More: Builders Bump Up Thanks to Drop in Existing Home Supply.)

Single family housing starts hit historic lows and are now just rising from the ashes. That is why some of the comparisons, like single family starts (up 35 percent from a year ago), sound so monumental and push the stocks higher. But investors need to keep these numbers in perspective.

“Housing starts at 894,000 is near where they were at the depths of the 1981 and 1991 recessions and 60 percent below the peak in January 2006,” pointed out Peter Boockvar at Miller Tabak.

The October numbers were driven entirely by multifamily apartment starts, up 10 percent month-to-month and up 63 percent year over year. Why are developers putting up so many more apartments when housing is supposedly recovering? Because there is still big rental demand and low supply.

“The consensus view on supply remains that it is not a threat to apartment fundamentals in the near term. Overall, demand for apartments (driven by household formations) should continue to rise with deliveries, especially in high(er) barrier coastal markets,” analysts at Cantor Fitzgerald said in a note.

There has been a lot of talk of increasing household formation, but what some fail to realize is that household formation can be a single family owner-occupied home or an occupied rental unit. Younger Americans are in fact moving out of their parents’ basements, but many are moving into rental units, and that is also a formed household. (Read More: The Housing Recovery Is Getting Real.)

Should investors be concerned about overbuilding in the apartment sector, given these huge jumps in starts coupled with the fledgling single family housing recovery? No.

“We’ve had four years of zero supply,” said David Toti of Cantor Fitzgerald. “There’s still a groundswell of demand. The shift from owning to renting is still moving in favor of the renter.”

Multifamily starts are now above 10-year averages. In fact they officially crossed them in October, but home ownership levels continue to contract. As for apartment performance? Landlords are raising rents and occupancies, and that does not point to any weakness, for now at least. (Read More: Existing Home Sales, Homebuilder Sentiment Rise.)

So why then are the multifamily REITs all down on the starts numbers? They have actually been underperforming all year, as investors seek higher yield in other sectors, like industrial REITs. But another factor could be Archstone Inc., an apartment building owner and developer owned by Lehman Brothers Holdings. It said Monday that it plans to raise up to $3.45 billion in its initial public offering that may happen this year. Investors may be making room for Archstone, pulling out of others to get in to the new player.

—By CNBC’s Diana Olick

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