by Calculated Risk on 4/27/2010 01:24:00 PM

Earlier today S&P released the Case-Shiller house price indexes for February, see: Case-Shiller House Prices "mixed" in February

Below is a comparison of real house prices and the unemployment rate using the First American Corelogic LoanPerformance national house price index (starts in 1976) and Case-Shiller Composite 10 index (starts in 1987). Both indexes are adjusted by CPI less shelter. This is an update to a post from almost a year ago.

Click on image for larger graph in new window.

The two previous national declines in real house prices are evident on the graph (early '80s and early '90s). The dashed green lines are drawn at the peak of the unemployment rate following the peak in house prices.

The unemployment rate peak in 2009 is likely, but not certain.

In the early '80s, real house prices declined until the unemployment rate peaked, and then increased sluggishly for a few years. Following the late 1980s housing bubble, real house prices declined for several years after the unemployment rate peaked.

Although there are periods when there is no relationship between the unemployment rate and house prices - like during the bursting of the stock market bubble - this graph suggested to me that house prices would not bottom in real terms until the unemployment rate had peaked - and probably later (the recent housing bubble dwarfed the previous housing bubbles, and the bust will probably take some time).

Real prices, as measure by LoanPerformance, hit new lows in February, although real Case-Shiller prices are still fractionally above the lows of last year. I expect further declines in both indexes later this year, and this graph suggests that real house prices are probably still 10% or more too high on a national basis.

Real prices can decline because of falling nominal house prices (likely in my view) or from inflation (or a combination of both).

Note: earlier I mentioned that S&P has expressed concern about the Case-Shiller seasonal adjustment - here is the announcement from S&P.