Pending sales of existing homes rose 10.4% in October, the National Association of Realtors reported Thursday.

The NAR's Pending Home Sales Index (PHSI), rose to 89.3 based on contracts signed in October from 80.9 in September. The index remained 20.5% below a surge to a cyclical peak of 112.4 in October 2009, which was the highest level since May 2006, when it hit 112.6.

"It is welcoming to see a solid double-digit percentage gain, but activity needs to improve further to reach healthy, sustainable levels," said Lawrence Yun, chief economist for the Realtors. "The housing market clearly is in a recovery phase and will be uneven at times, but the improving job market and consequential boost to household formation will help the recovery process going into 2011."

Regionally, all but the West moved up. The PHSI in the Northeast jumped 19.6% to 71.3, still 27.3% below October 2009. In the Midwest, the index surged 27.3% in October to 81.7, also still 24.8% below a year earlier. The index in the South, the largest region, was up a more modest 7.1% to 93.8, 18.4% below October 2009. In the West, the index slipped 0.4% to 104.3, 15.6% below a year earlier.

An index of 100 is based on the average level of contract activity during the baseline year of 2001.

The Realtor group is expecting the momentum to continue but is clearly concerned over the fate of the mortgage interest deduction as Congress haggles over the recommendations from the presidential deficit commission.

Said Yun, "We now have some consumer concerns regarding the mortgage interest deduction, an important component in housing affordability.Preliminary results of a new survey show nearly three out of four homeowners and two out of three renters consider the mortgage interest deduction to be extremely or very important to them. Homeowners already pay between 80 and 90 percent of all federal income taxes, and additional tax burden would hurt them and the economic recovery, so we have a reasonable hope that it will not be changed."

Wall Street was surprised by the number. Wells Fargo's Carl Reichardt, writing in note to investors, said, "We nor consensus expected such a strong improvement in PHS in October; we believed foreclosure moratoria by several large banks would slow sales somewhat. However, mortgage rates, which reached 30-year lows in October, may have been partially responsible for the increase in activity ... That said, this data is a positive surprise and indicates that existing home sales activity could be improving at a more meaningful clip than heretofore believed."

Similarly, Michael Rehaut at J.P. Morgan said in his research note, "We view October's strong sequential gain, while off depressed levels, as still encouraging and consistent with our outlook for a stabilizing to slightly improving housing market over the next 12 months." He added, "We continue to believe the builders are well positioned to demonstrate improving order growth in 4Q10 and 2011, as well as profitability for several builders next year."