NEW YORK (TheStreet) -- The recovery in the housing market is now defying expectations. So is Janet Yellen doing a quick rewrite of Friday's speech?

Existing-home sales increased last month to their highest annual pace of the year, rising 2.4% to a seasonally adjusted annual rate of 5.15 million from a slight downwardly-revised 5.03 million in June, according to the National Association of Realtors (NAR). Sales have now risen for four consecutive months, yet still remain 4.3% below the 5.38 million-unit level from last July, which was the peak of 2013.

"The number of houses for sale is higher than a year ago and tamer price increases are giving prospective buyers less hesitation about entering the market," said Lawrence Yun, NAR's chief economist. "More people are buying homes compared to earlier in the year and this trend should continue with interest rates remaining low and apartment rents on the rise."

The better-than-expected July home sales number comes in the wake of this week's surprisingly strong monthly housing starts figure. The Commerce Department reported Tuesday that U.S. home construction rose 15.7% in July to a seasonally adjusted annual rate of 1.09 million homes. That's the fastest pace in eight months and follows declines of 4% in June and 7.4% in May. Applications for building permits also showed strength in July after back-to-back monthly declines, advancing 8.1% to an annual rate of 1.05 million.

Considering the fact that no sector of the economy took a harder hit in the Great Recession than housing with new home starts plummeting 75% in 2009, there is little wonder why economists are cheering - and scrutinizing - the turnaround.

"The housing sector is a key provider of well-paying jobs, both directly and indirectly. July's strong numbers, coupled with the Commerce Department's forecast that this momentum will continue in the coming months, are key indicators of the country's improving economic health," said Bernie Williams, chief investment officer of Investment Solutions at USAA.

Of course, a rapidly improving economy could push an already-tapering Federal Reserve to move quicker on a Fed funds rate increase, which would in turn light a fire under mortgage rates and hurt affordability. The median existing-home price for all housing types in July was $222,900, which is 4.9% above July 2013 and marks the 29th consecutive month of year-over-year price gains, said the NAR.

Right now, however, prospective buyers have low rates on their side. According to mortgage buying behemoth Freddie Mac, the cost of getting a home loan fell to the lowest level of the year last week with the average rate for a 30-year fixed mortgage at 4.12% compared to last week's 4.14%. The average rate for a 15-year fixed-rate mortgage was 3.24% compared to 3.27% the prior week.

Both rates are below the levels of last summer when former Fed Chairman Ben Bernanke spooked the stock market by talking about reducing the Fed's monthly bond purchases. Judging by her Congressional testimony last month, Chairwoman Janet Yellen does not want to repeat that mistake, preferring instead to confirm a solid recovery in housing before making any big moves.

"The housing sector...has shown little recent progress," Yellen told the Senate Banking Committee last month. "While this sector has recovered notably from its earlier trough, housing activity leveled off in the wake of last year's increase in mortgage rates, and readings this year have, overall, continued to be disappointing."

Those comments, of course, came after months of data plagued by a cold, cold winter. The big question will be what she will do now that housing is heating up. Yellen gives her widely anticipated speech on Friday at the Fed's annual conference in Jackson Hole, Wyoming.

"The forecasted time frame for the increase is still relatively large, but as this worry continues to build, there's a good chance we'll see more market volatility," said USAA's Williams. "We may even see a lot of volatility, especially when compared to the docile levels of recent months."

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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