The Fed will consider buying more mortgage-backed securities to help, said Ben Bernanke, the Fed chairman. Such a move could send borrowing costs even lower. 

“The housing sector is a very important sector,” Bernanke said at a news conference. “Problems in that sector are a big reason why our economy’s not recovering more quickly.” The Fed is holding a two-day policy meeting — which ends Thursday — to weigh options. 

Economists believe that if more people were buying homes then it could lead to a boost in consumer purchases for other sectors, from furniture to appliances. They note that the housing market has led the economy out of recessions in the past, since it creates jobs and more spending on goods and services. Plus, the Placerville, El Dorado County, California of the “Sierra Foothills Region” offers great opportunities and home values.

Source: “Fed Focus: Housing Could be Key to Stronger U.S. Rebound,” Reuters News (Nov. 3, 2011)

Bernanke predicted a “moderately stronger” overall pace for the economy in 2011, noting the Fed has seen “increased evidence that a self-sustaining recovery” is occurring.

He cited improvements in consumer spending and a drop in jobless benefit claims as signs of recovery. However, he said it would take four to five years for the labor market to return to normal unemployment levels. The U.S. jobless rate dropped to 9.4 percent from 9.8 percent last month, but he noted the decline was partially due to a number of people leaving the workforce.

In his testimony to the Senate Budget Committee, Bernanke defended the Fed’s controversial plan to purchase $600 billion in government bonds, a move he says will boost the economy by lowering interest rates and encourage spending.

“Doing nothing will not be an option indefinitely,” Bernanke told the Senate Budget Committee. “Diminishing confidence on the part of investors that deficits will be brought under control would likely lead to sharply rising interest rates on government debt, and, potentially, to broader financial turmoil.”

Source: “Bernanke Grows More Confident in U.S. Recovery,” Reuters News

Bernanke’s reply: There are bumps and potholes on the road to recovery, but the Fed “expects continued moderate (economic) growth, a gradual decline in the unemployment rate (to about 7 percent) and subdued inflation” over the next couple of years.

No sooner had Bernanke delivered his testimony than some of those “bumps” in the road popped up: The Commerce Department reported new housing starts dropped by 5 percent in the latest month, and the National Association of Realtors reported existing home sales down by a similar percentage.

But keep in mind the central point Bernanke was making in his forecast: Troubled though it may look with any single statistical report, the fact is the national economy continues to grow – by about two and a half percent on an annual basis – and many elements of the economy are better off this year than the were the year before.

Take the Commerce Department’s housing starts number: That five percent decline was mainly the result of a big drop in starts of new rental apartment units – not a drop in starts of new single family houses, which were stable.

In fact, the Commerce Department survey found that permits pulled by builders for future construction on single family homes were actually up in three out four of the major regions of the country. Analyzing the government’s data, Bernard Markstein, senior economist for the National Association of Home Builders, was encouraged – and predicted increases in both starts and sales over the coming several months.

The latest sales report for existing homes from the National Association of Realtors also had some bright spots: Sales in June were 10 percent higher than they were in the same month the year before. Even median prices of all homes sold were up slightly, and that’s despite the fact that one third of sales were “distressed” in some way – REOs, foreclosures or short sales.

Meanwhile, hints of a rebound in future sales emerged in the latest report on new mortgage applications to buy homes.

The Mortgage Bankers Association found that purchase applications overall jumped by 3.4 percent – and by 8 percent for FHA loans to buy houses. Those transactions won’t go to closing for two to three months … but they’re a sign of where we’re likely headed.