By Ruth Mantell, MarketWatch

This update includes corrected data from the National Association of Realtors regarding the percentage change for housing starts.

WASHINGTON (MarketWatch) — In a sign that the U.S. housing market may strengthen in coming months, an index of sales contracts on previously owned U.S. homes rose 5.3% in June from the prior month, the National Association of Realtors reported Thursday.

The index, which is considered to be a leading indicator of existing home sales, reached its highest level since October, but was still down 12.3% from June 2007.

Pending home sales increased in June in all four regions, with a gain of 9.3% in the South, 4.6% in the West, 3.4% in the Northeast and 1.3% in the Midwest. Despite the monthly gains, all four regions remain below year-ago levels.

The May pending home sales index was revised to a decline of 4.9% from the prior estimate of a 4.7% drop.

Some analysts have seen stability in recent pending home sales data, though it may still be too early to call a bottom to the market. A pickup in contract signings “appears to be broadening,” NAR said, with on-year gains in mid-America markets such as Columbus, Ohio; Charleston, W.V.; Oklahoma City; and Colorado Springs, Colo. The group said pending sales have fallen “significantly” in Texas and Pacific Northwest markets.

Sales of foreclosed homes may be driving activity, wrote Ian Shepherdson, chief U.S. economist at High Frequency Economics.

“We doubt sales of non-foreclosed homes are rising, given the recent rise in mortgage rates and continued price declines,” Shepherdson wrote.

Late last month, President Bush signed massive housing legislation to shore up the housing market by providing an emergency safety net for mortgage giants Fannie Mae (FNM:

FRE 5.99, -0.50, -7.7%) , and helping several hundred thousand families avoid foreclosure. Also, the Federal Reserve has recently approved new rules to clean up the mortgage market by barring some risky lending practices.

NAR President Richard Gaylord said the housing stimulus package will provide long-term relief.

“Provisions to stem foreclosures are helpful, but a greater lift to the economy should come from higher mortgage limits, enhancements to the FHA loan program and the first-time home buyer tax credit,” he said. “These are excellent tools that will help buyers get into the market to take advantage of the unprecedented drop in home prices in many areas, as well as a wide selection of inventory, to make an investment in their future,”

NAR sees existing-home sales rising 7% to 5.51 million in 2009 from 5.15 million this year as first-time buyers take advantage of a temporary tax credit. The group also expects new-home sales to fall 8.8% in 2009, and housing starts, including multifamily units, to decline 17.2%.

NAR expects home prices to rise 3% to 6% next year. Lawrence Yun, NAR’s chief economist, said prices fell less than expected in the second quarter.

“Buyers entering the hardest-hit markets, in some cases with multiple-bid offers, may have put a floor on prices,” Yun said. “In addition, rising commodity prices and higher construction costs have resulted in a very unusual market today with existing-home prices being less than replacement building costs in some areas.”

As I have mentioned previously, probably 90% of the properties that I am looking at with customers these days are foreclosures. Most of them need work. At the minimum, all need carpet and paint ($5000). Most need much more than that including windows, kitchen & bath remodels, and potentially a new roof (see Flipping a $30,000 House).

When I was talking to Rob Bonahoom today, I realized that I preach about the fantastic opportunities to buy houses in North Minneapolis at incredible prices, but I rarely write about how the rehab financing works.

When you buy a house, traditional financing sources assume the house is move-in ready. They don’t care if the carpet is old or it needs paint, but they will not give you mortgage if the copper is missing or the furnace is dead. Rehab financing bridges the gap and give you cash to fix up the house and make it livable. It is meant as a temporary solution (most rehab loans are 6 months long), allowing you to buy and renovate the property. You will secure traditional financing via a refinance at the end of your rehab.

The program that we have in place allows a buyer to put 20% of the total rehab and purchase price into a secured savings account with our bank. You did not put in a down payment, but rather you pledged your money with the bank in case you can not finish the rehab and the bank needs to take back the property. The bank estimates the after repaired value by having an appraiser look at the property prior to any work starting and then reviewing the work to be performed and extrapolating a new value (after repaired value).

At closing, the bank will pay the seller and then reserve the remainder of the loan for construction/rehab. During your rehab, you or your contractor will make draw requests from the bank to pay off materials and work that has been completed.

At the end of your rehab, you simply contact your mortgage banker and have him refinance you into a traditional mortgage. If you are under 75% LTV, you may not need to put any money into this transaction. Once you close your refinance, our bank gives you your 20% back. Consequently, you have a fully renovated property that you have 25% equity in that you only spend $6-8000 in closing costs to acquire.

If you want more information on how you can acquire and renovate investment property for less than $10,000 per property, contact me now?

Probably 90% of the properties I show or preview these days are foreclosures. Many of them have been vacant for months or even years. Add to the time is that almost no one cleans up their house if they are losing it and what do you get? Smelly houses.

There is nothing else like a vacant North Minneapolis house in the warm summer heat. Even in the middle of winter they have a unique smell you can’t beat!

Jennifer Kirby has found that same smell even in nice suburban houses. Check out her her great post at Minneapolis Real Estate Blog.