Are the home builders foreshadowing the future of the housing market? We sure hope so, because builder sentiment suggests better days ahead.

We say that because the home builder sentiment index surged a whopping six points to 35 in July. The monthly improvement is the largest in nearly 10 years, and it lifts the index up to where it was in March 2007. What's more, the posting wasn't skewed by a few bullish outliers. All regions reported gains. Looking ahead, the expectation is that sales will continue to improve over the next six months.

When you parse the trend in housing starts over 2012, it's easy to why home builders are more optimistic. The uptrend in new home sales is finally working its way into new construction. Housing starts in June improved 6.9 percent over May. Gains were prevalent in both the single-family and multifamily components. The more-important single-family component saw starts increase 4.7 percent, while the volatile multifamily component rebounded 12.8 percent, following a 19.3-percent drop in May.

The news on existing homes was less rosy, proving again the housing market is a heterogeneous market. Sales for June dropped a surprising 5.4 percent to a 4.37-million annualized rate. The lower sales pace was reflected in inventory, which rise to a 6.6-month supply from 6.4 months in May.

There were still some positive takeaways. The national median sales price for an existing home rose to $189,400, a 5-percent increase over May and a 7.9-percent increase over June 2011. Higher prices might be discouraging sales on the low end of the market, but the price rise, which has been confirmed in other data sources, is good news for homeowners struggling with negative equity.

We've been reporting for months now that the housing market is on the mend. More important, it's on the mend in more local markets. After all, local markets are what matter most; few of us conduct business nationally.It's reassuring to have our anecdotal evidence reaffirmed by official data. The Federal Reserve, in its latest Beige Book release, reports that the trend remains largely positive. The Fed notes that most districts reported declines in home inventories, while stabilizing and home price were becoming more of the norm.

That said, many pundits and market watchers continue to worry aloud about shadow inventory. To us, though, the state of the U.S. economy is the much bigger concern. Job growth has been anemic in recent months. The latest quarterly data show that hiring by companies is the weakest it has been in two years. Unfortunately, the contraction has been equal opportunity: growth in both consumer spending and business investment have slowed. An economy that is marred by reduced spending and investing will also be marred by less hiring.

Slow economic growth could spur the Fed to pump even more money into the economy. The rationale is that more money will induce more spending and investing, because there is less incentive to hold cash due to the reduced value of each note. Concurrently, more money will keep lending rates low because there is more money to lend.This sounds good in theory, but there a few issues with the Fed's easy money policy, which we'll explicate below.

Courtesy of Jessica Regan.

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