by Calculated Risk on 6/20/2009 05:00:00 PM

We've discussed supply and demand, price-to-income and price-to-rent ratios, and real house prices, in trying to forecast how long house prices will continue to decline.

This is a comparison of real house prices and the unemployment rate.

Note: House prices are national from Case-Shiller (back to 1987) and Freddie Mac's Purchase index (back to 1970). The Case-Shiller index was set equal to the Freddie Mac index in Q1 1987, and then both indexes adjusted by CPI less shelter.

Click on image for larger graph in new window.

The two previous national housing bubbles (late 1970s and late 1980s) are shown on the graph. The dashed purple lines line up the peak unemployment rate - following the housing bubbles - with house prices.

It appears real house prices declined until the unemployment rate peaked, and then remained stagnant for a few years. Following the late 1980s housing bubble, the Case-Shiller index suggests prices declined for a few years after the unemployment rate peaked.

Although there are periods when there is no relationship between the unemployment rate and house prices, this graph suggests that house prices will not bottom (in real terms) until the unemployment rate peaks (or later, especially since the current bubble dwarfs those previous housing bubbles). And it is unlikely that the unemployment rate will peak for some time ...

I'll post some similar graphs for a few Metropolitan Statistical Areas (MSA) later, comparing local house prices with the local unemployment rate.