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Actually, when two indicators that are calculated along different lines converge, such as the slope of your graph and the calculations you made last summer on overhang, then the predictive value of something like that graph goes up greatly. Unlike Spain, a financier who loses his job on Wall Street today can be working and buying a house in Minneapolis next week. I agree wholeheartedly that interest rates can only rise - and already are on the long end, and in mortgages. However, mortgage rates will have to hit 6%, before a person with a job really feels it. The average joe with a job deals with cash flow and now is looking at real affordability in many markets. The rise in cash deals around the country over the past year or two seems to indicate that many are ready to invest in the rental market, which is amazingly firm considering the financial climate. The zero interest rates policy could keep mortgages affordable for the next two years, which is key, because so many junk mortgages were written on a 5-year ARM between 2005-2007. ZIRP may just keep banks afloat until they work through the cresting wave of junk in 2012. In the meantime, suffering will be highly uneven.

It looks like a classic case of economic substitution, where many of those afflicted with mortgages they now cannot afford have quickly moved into a rental market they can afford, especially for houses. As a condo owner, this hardly cheers me up, because I foresee condo overhang lasting a lot longer than that of houses, especially in the SW and SE. Baltimore is anemic, and DC condos are way overbuilt. As you deduce, Morgan Stanley likely is not long for this world, and more big construction firms are going to have to throw ballast and/or disappear. This Great Recession looks not so much like the Depression or Japan as a super-sized version of 1979-83, when companies fired older and less productive workers and radically realigned their operations with new technologies and strategies. Much of the future, therefore, will depend on how the federal government deals with the growing wave of Social Security and Medicare recipients.