Dramatic improvement in commercial real estate

Real estate markets are still very depressed, of course, but they are doing a whole lot better than people expected just a year ago. That's the message of this chart, which plots the price of a basket of commercial real estate-backed securities rated AA and issued back in October '07. Last summer these securities were trading around 35 cents on the dollar, which meant that investors expected a massive wave of defaults to occur. Today they are trading at 63 cents on the dollar, which means that default expectations have collapsed relative to what they were last year. This improvement also means that banks, institutional investors and corporations who have held these securities and were forced to write them down in the wake of the crash because they were "impaired," have now realized substantial gains that have not yet flowed through to their balance sheets (they had to realize the loss when the securities were declared impaired, but they won't have to realize the gains until they are sold).