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:

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.”