Freddie Mac expects third quarter new and existing home sales to reach an annualized rate of 4 million, a possible 20.7% decline from last year and 23% drop from the previous quarter. In its September economic outlook, Freddie said recent reports of plummeting home sales and near record-high delinquencies has shaken confidence in the “fragile” housing recovery. After the homebuyer tax credit expired in April, the National Association of Realtors (NAR) reported existing home sales fell 27% in July, and new home sales have fallen to the lowest point since 1963. The news will further weigh on the market. JPMorgan Chase analysts lowered expectations of housing recovery in the next four years. Jon Daurio, chief executive at the distressed loan purchaser Kondaur Captial, warned that home prices could fall another 20% as well. “The main issue for the housing market outlook is how much of the recent weakness in home sales can be explained by transactions that were pulled forward by the credit – that is, ‘borrowed’ from sales in future months – versus signs that a more fundamental deterioration may be underway,” according to Freddie Mac. Freddie has considered two scenarios for how the market will respond to the missing government stimulus. The first is a “payback” of the “borrowed” sales over a gradual recovery. Under this scenario, home sales would drop another 10% in August from the low in July that start to climb out of the bottom. This assumes about 600,000 of the home sales were pulled forward in response to the tax credits. The second scenario only half of these sales were pulled forward, and the rest were purchases that otherwise wouldn’t have been made without the credit. Under this scenario, sales would recovery faster, perhaps by the end of October. “Indeed, pending home sales rebounded 5 percent in July, which would be most consistent with the second scenario of a partial payback and faster recovery,” according to Freddie. “Nevertheless, while the decline in sales to date appear smaller than what would likely occur in a ‘double dip’ housing and macroeconomic downturn, we remain vigilant for any further signs of weakening.” In its economic outlook, Freddie also predicted that the 30-year fixed-rate mortgage rate would head back up through the rest of this year and the next, passing 5% in the last quarter of 2011. Freddie also forecasts that the unemployment rate would start to fall, reaching 8.6% by the end of next year as well. Write to Jon Prior.