Home prices will rise in 2010: reportPending sales of previously owned U.S. homes rose unexpectedly to their highest level in 3-1/2 years in October, a survey showed on Tuesday, suggesting the housing market recovery was gaining steam.

The National Association of Realtors said its Pending Home Sales Index, based on contracts signed in October, rose 3.7 percent to 114.1, rising for a ninth straight month. This is the longest streak of gains since the series started in 2001.

Analysts polled by Reuters had forecast pending home sales, which lead existing home sales by one to two months, falling 0.8 percent in October after rising to 110 in September.

The Pending Homes Sales Index surged a record 31.8 percent in October from its year-ago period.

The housing market, the main trigger of the worst U.S. recession in 70 years, is recovering from a three-year decline. Housing construction contributed to economic growth in the third quarter for the first time since 2005.

Recovery is being supported by the popular $8,000 tax credit for first-time buyers, low mortgage rates and falling house prices. The government last month extended the incentive into next year and added a $6,500 credit for home owners buying a new residence. It had been due to expire on November 30.

"The credit is helping unleash a pent-up demand from a large pool of financially qualified renters," said NAR economist, Lawrence Yun.

Data from the Realtors group last week showed sales of previously owned homes rose to their highest level in more than 2-1/2 years in October. Yun, however, cautioned sales could dip in the months ahead.

"The expanded tax credit has only been available for the past three weeks, but the time between when buyers start looking at homes until they close on a sale can take anywhere from three to five months," said Yun.

"Given the lag time, we could see a temporary decline in closed existing-home sales from December until early spring when we get another surge, but the weak job market remains a major concern and could slow the recovery process."

The pending home sales index in the Northeast jumped 19.9 percent to 100.2 in October. In the Midwest the index rose 11.6 percent to 109.6. Pending home sales activity in the South increased 5.4 percent to an index of 115.4, while contract activity in the West fell 11.2 percent to 127.7.