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Surprise, surprise! Guess which part of the economy has been showing improvements lately!

The job market?


The retail sector?

Nope, sorry!

The housing market?

Ding ding ding! We have a winner!

The housing market has been a real drag on the economy since the start of the financial crisis, but recent U.S. housing data shows that it may finally be busting out of its rut!

For instance, the annualized number of housing starts rose to 780,000 in June to register a new three-year high, while building permits landed at 760,000! Building permits have certainly come a long way from the lows we saw back in 2009, when we saw it registering in the ballpark of 500,000.

It makes sense that demand is picking up since current economic conditions support housing purchases. Thanks to the Fed’s highly accommodative monetary policy, interest rates are at all-time lows. Now, couple that with low home prices, and you’ve got a solid reason to buy!

Heck, studies by the Mortgage Bankers Association (MBA) even show that owning a home may be less expensive than renting in some places! According to the MBA, the average 30-year fixed-rate mortgage recently dropped to 3.74%, the lowest the Association has ever recorded.

With demand for houses on a steady rise, it’s no surprise that builder confidence is at a high as well. According to the National Association of Home Builders, confidence hit a 5-year peak in July!

Housing Starts

The reason why this recent uptick in housing market data is causing such a fuss in the markets is that the housing industry is normally a leading indicator of economic health.

When people are spending on homes, this bodes well for other industries, as people end up spending on furniture, appliances, and other items.

The housing figures also come at a good time, as other economic data have been particularly disappointing.

Retail sales figures earlier this week showed a decline of 0.5% last month, after it was projected to increase slightly by 0.1%. Spending on computers also expanded at a much slower pace than in previous quarters, rising by just 3.5% during the Q1 2012. Meanwhile, consumer confidence is at its lowest level in over six months.

It will be interesting to see how this all plays into the Fed’s plans for monetary policy. In his speeches this week, U.S. Fed top gun Ben Bernanke acknowledged the improvements in the housing sector, saying that they were positive.

At the same time though, Bernanke expressed caution as he pointed to a backlog of homes that may enter the market soon as well as some difficulties that some consumers may encounter when applying for credit.

Clearly, Bernanke likes to play coy about his expectations and the Fed’s plans. Remember, he didn’t exactly reveal if the Fed would actually be implementing additional quantitative easing measures.

For now, what seems certain is that the Fed will be keeping rates at current levels for a long, long time, as the low rates finally seem to be having an effect on the housing market.

Given how the Fed seems to be taking a wait-and-see approach, it may take its sweet time to see whether or not the past couple of months’ worth of housing data can jumpstart other industries before deciding to pull the trigger on QE3 or not.