If U.S. Federal Reserve Chairman Ben Bernanke needs any more evidence regarding the slowdown in the U.S. economic recovery, he need look no further than U.S. housing prices, which have fallen for 17 consecutive quarters -- including a 0.62 percentage point decline in the second quarter of 2011 from the first quarter, based on data compiled by the Federal Housing Finance Authority.

What's more, on a year-over-year basis, home prices are down 5.9 percent, compared to a 4.3 percent year over year decline in June.

In addition, existing home sales fell 3.5 percent to a 4.67-million-unit annual rate in July with the median price for all types of housing at $174,000 down 4.4 percent from July 2010. Also, new home sales fell 0.7 percent in July to a 298,000-unit annual rate with the median sales prices for a single family home at $222,000 down 6 percent from June, but up 4 percent from July 2010.

Further, inventories show bloated housing markets: a 9.4-month inventory of existing homes in July, up from a 9.2-month supply in June; and a 6.6-month supply of new homes in July, unchanged from June. Inventories are still well above healthy levels for each market: a 3- to 5-month supply is considered normal for each.

Housing: Still A Big Part of U.S. Economy

A change in U.S. Federal Reserve monetary policy -- traditional (short term interest rates) or unconventional (quantitative easing) may or may not be implemented when Bernanke delivers his Jackson Hole, Wyo. central bankers conference speech Friday, but you can rest assured that he has one eye on the housing market's performance.

And the reason is obvious enough: historically, increases in home sales are strongly correlated with increased demand and an economic expansion. That's because housing activity does not operate in vacuum. When new homes are sold, homeowners tend to buy durables goods / big ticket items for the new home: furniture, appliances, home supplies -- an uptrend in each of which is good news for the U.S. economy and bullish for the U.S. stock market.

However, a sluggish economic with sub-par job growth has dampened home sales, and foreclosures remain above normal levels, and the two have combined to swell inventories, which has resulted in steady price declines. Moreover, the price declines are occurring as mortgage rates fall to their lowest levels in about 50 years.

Housing Sector/Economic Analysis: Given current economic fundamentals, it will take at least two quarters, and probably more, for the U.S. housing sector to normalize, and that will serve as a headwind on U.S. GDP growth -- housing is still that important to the U.S. economy.

Now, the obvious question is: will the dismal housing data be enough to prompt Chairman Bernanke to implement the third part of quantitative easing, QE3? At this stage, probably not, but if sector conditions worsen in the quarter ahead, combined with little progress on job growth, that will probably push Bernanke and the Fed in favor of QE3.