Homes under contract rose 4.3% in August, continuing an upward trend that began after the expiration of the federal home buyer tax credit, the National Association of Realtors reported Monday.

The NAR's Pending Home Sales index ticked up to 82.3 based on contracts signed in August from a downwardly revised 78.9 in July, but the PHSI remained 20.1% below August 2009 when it was 103.0. The PHSI for July had originally been reported as 79.4. Wall Street was expecting a reading of 81.4.

Lawrence Yun, NAR chief economist, said the latest data indicates a gradual improvement in home sales in upcoming months. "Attractive affordability conditions from very low mortgage interest rates appear to be bringing buyers back to the market," he said. "However, the pace of a home sales recovery still depends more on job creation and an accompanying rise in consumer confidence."

Low mortgage rates, he said, were critical to recovery. "Recent rising trends in producer prices at the intermediate and early stages of production, along with very high commodity prices, are raising concerns about future inflation and future mortgage interest rates," he said. "Higher inflation would mean higher mortgage interest rates."

Regionally, the PHSI in the Northeast fell 2.9% to 60.6 in August, 28.8% below August 2009. The Midwest rose 2.1% to 68.0 but is 26.5% below a year ago. The South increased 6.7% to 90.8, 13.1% below August 2009. The West was up 6.4% to 101.1, still 19.6% below a year earlier.

Stephen East at Ticonderoga Securites took the pending sales report as a good sign for the housing market. In a note to investors, he wrote, "Up 4.3% versus July, this is a good metric and illustrates a housing market in the process of healing from the tax credit hangover. Moreover, not seasonally adjusted PHS increased 6.4% versus a month ago. We are disappointed that the builder equities have not performed better on this news, but the press has suggested traders are focused on the 20.1% y/y decline. We scratch our heads on this as a 20.0% decline is up against a tax credit skewed result last year and was implied by the consensus estimate. Again, we believe today's news is a positive for the housing market providing a ray of optimism as actual sales were much better than our expectation of flat sequential contract signings."

Similarly, Michael Rehaut at J.P. Morgan wrote, "Amid this demand environment, we continue to believe the builders are well positioned to demonstrate improving order growth in 4Q10 and 2011, as well as show further improvements in core operating margins, and hence, we reiterate our positive sector stance."