In short if you expect rental income flows to remain stable and yet you also think valuations should go up rather than down you're dead wrong.

Here's the simple fact of it: "Cap rate" expresses the return on invested capital as a percentage.  A $500,000 property that has net operating income (that is, income minus operating expenses) of $25,000 has a "Cap Rate" of 5%.

What is a reasonable "cap rate"?  It is always higher than the short-term interest rate on Treasuries because there is risk in a real estate transaction but there is no risk in short-term Treasuries.  That is, if I get a 5% payout on $500,000 worth of 13 week T-bills rolled over every 13 weeks for a year (that is, the IRX is at 5%) for a real estate transaction to make sense it must pay materially higher than that cap rate because I cannot control for the risk that the value of the property may decline, there is significant expense in disposing of the property if I choose to do so and real estate is illiquid (that is, I cannot call someone or get online and get rid of it in a day or three.)

My view has always been that a reasonable minimum cap rate is around 7-8% and I am personally not interested in anything under roughly 10% in real estate because the illiquidity is always there yet it is frequently ignored in terms of the risk profile yet it is in fact the most-extreme problem since it can and does come up at the worst possible and can prevent an exit for six months or more!

There are two ways for cap rate to go up -- the rental can increase or the price of the property can go down.  Of course if the latter happens and I already own it I'm the one who is now sitting on a large capital loss -- that's bad.  If someone else is sitting on it and I want to buy it that's good.

My general rule for any business transaction is that you don't make money when you sell things -- you always make money when you buy them.  This sounds backward but it is not; buying at a good price is always preferrable to trying to figure out how to claw your way out of the hole when you go to sell whatever that thing might be.

People have gotten seriously-intoxicated on the formerly-suppressed rate environment, especially during the 2020-2023 time period.  Those days are gone and they're very unlikely to come back in my remaining lifetime.  If you expect to see that again within a decade or two I believe you're going to be disappointed at best and are quite-likely to be ruined financially, especially if you are in any way reliant on that.

Buying property to live on is not the same thing as buying property for commercial purpose, whether long-term or short rental or, for that matter, to set up a business on the land itself.  Those are very different calculations and one has nothing to do with the other; a home is a consumer durable good, not an investment despite the claims otherwise by many over the last couple of decades.  There are a huge number of external factors that can ruin it from an investment perspective (e.g. property taxes shooting the moon) which happen often enough over long periods of time that counting on such is a very bad idea.

Never mind that the "30 year mortgage" never made sense in a world where the average holding time is seven years -- and that latter has been true for decades.  Why?  Go look at an amortization table; you only pay down 10% of the principal during that seven years.  All of the rest of the money went to the bank!  It was the insane view over the last two+ decades of price appreciation that made people think this "worked" when in fact it never did because permanent price appreciation in excess of actual realized inflation is mathematically impossible -- the only question is when that will end, not if it will.  But the securitizers and security holders (e.g. MBS) all banked on that same seven year duration and now, with rates much higher all the older securitized loans are not prepaying (I wouldn't either if I had one when I have a 3% mortgage but can get 5% in short-term Treasuries with no risk!) so now the worm has turned against said holders.  Oops.

In the investment world, including both longer-term "conventional" rental properties and especially the short-term rental world, along with commercial real estate, all this applies and the shorter the term of the rental the greater the risk and thus the greater the cap rate you should and skilled persons will expect because those who overpaid and want to or must sell are sitting on huge capital losses!

Right now there is a severe imbalance in this regard in that cap rates are in many cases below the short-term Treasury rate.

IMHO you'd have to be out of your mind to accept that sort of alleged "return" and thus, at those prices, to be anywhere near that space.

Not in AI on a general sense, but in the "deep fake / generated identity" sense, yes it is.

There are a lot of people who have the belief that the fact that Microsoft has demonstrated this can be done with one PC-grade card (albeit one that costs about $2,000) that in turn means demand will be driven higher and firms like Nvidia will go (further) toward the moon.

Nope.

Why not?

Because this is demonstration that commoditization of the space is now in the final stages.  Remember that a 3060 can be had for under $300 and has about 1/3 of the performance.  That means that three of them are about $1,000 (assuming you have the supporting CPU power to drive them) and about half the 4090 price.

Do you see the gradient there?  Those two cards are about 18 months apart in terms of time which means in another 18 months the 4090 will probably be $300 and there will be a new "king of the hill" that is $2,000 and three times faster.

Maybe.

Here's the rub with that: I had a 1080TI in my desktop machine because I do some video editing.  That is, the editing and rendering required a dedicated video processor.  I bought the 3060 (which is what I have now) because the price for the performance improvement was reasonable.

Today I'd buy the 4060 which is about half the speed of that 4090 and is the same $300!  In other words for the same money I am now at one-half instead of 1/3d of the 4090s price which means I can buy two of them and for $600 have that $2,000 card's performance, assuming what I'm doing can be partitioned up across both cards.

Note also that the 4090 has a TDP (power dissipation) of 450W while the 4060 only requires 115W, so if you need two of them you're also saving half the power budget at the same time!

This is what always happens with technology and the wall comes when it does for the companies in the space.  I can buy a newer PC or laptop today that is "spec-faster" than what I have now.  But unless I have a use for the other machine I'd be crazy to do it as there's nothing wrong with the current one and from a user perspective I will not get any more productivity out of it; in the PC space the marginal gains for each new generation have dropped to near-zero with the exception of some niche uses.

In fact the last such upgrade I did on my desktop motherboard was several years ago.  I just did a "step" upgrade on the server processor here which gave me 50% more cores at the same speed for $100, in other words 50% more processing for almost no more money, other than the fact that I had to buy a better heat sink as the original, while perfectly-adequate for an 80W TDP at full power was marginal at 120W so there was another $50 involved to do that (although I still have the other one and its perfectly-suitable for another machine with a CPU in the sub-100W TDP range, should I ever need it.)  I did the same thing with the previous generation of board in that server (which had dual Xeons from a far-earlier era) in that as newer versions came out I was able to get two much faster ones in the older generation for almost no money and the cost of swapping them out was $20 for some CPU heat paste to re-apply to the top of each (which I still have, and is enough to do another half-dozen CPUs.)

Look at Intel's price chart all the way back to 2000.  During the peak crazy of "more-more-more!" they hit $75; where do they trade now?

Remember, this was "all Internet, all the time, everywhere and everything" which is a whole lot more penetration than "AI anything."

If you believed Intel was going to $500 your backside is quite sore, especially adjusted for inflation over that 25 years.

Now look at Nvidia at $850 and tell me what you think after it more than tripled in the last year.

I'm not saying they're a bad company -- they aren't, and I both like their products and use them.

But if you think they are not likely to trade sub-$100 in the next few years you are betting that somehow unlike every other commoditization cycle in the technology space this one will be different.

There's a lot of misinformation and worse flying around -- and given that after doing things that destroy your health errors here are the second-most difficult to recover from and can ruin you financially, this is truly sad.

First, interest rates on loans are not historically high, nor unreasonable.  In fact they're bog-standard up-the-middle from a historical point of view in an economy with an actual 1-2% inflation rate.  The rate of short-term (that is, less than one year) borrowing in a 2% inflation economy with a 2-3% productivity improvement (historically about average) should be about 5%, and that for longer-term money about 7%.  Why?  Because time has value; go ask any 60 year old how much they'd pay to have the last 20 years back.

In a normal market the average ownership period is about 7 years.  You have a 30 year loan as the "usual" but the average ownership is 7 years; this is why most mortgages are based on the TNX, or 10 year Treasury rate -- its the closest large-liquidity government bond issue.

So spare me the whining driven by the industry and, I might add, the belief of many cultivated by the press and government that time has not only no value but negative value, just like the fantasy land world they cultivate where as long as your credit card still works all is well.

Thus it is a false statement that rates are "high" right now.  Rates would in fact be normal in a 2% inflation and 3% productivity economy but we currently have inflation above that -- and wildly so in several mandatory purchase items such as car and homeowner's insurance, so in point of fact they're "a bit below where they should be" -- not "high."

Second, these policies and beliefs have directly driven up costs of home ownership that you have little or no control over -- specifically, property taxes and insurance.  You can insulate yourself somewhat from the tax problem by where you buy and live in that some governments are more-crazed with the premise of "no cost to spend without limit" than others, but the insurance problem is not so-easily avoided.  Simply put as prices go up for materials and labor, never mind the price of a given house so does insurance because every time there is a loss it has to be paid and that is recovered in premiums, otherwise there's no insurance at all.  Further, said price ramps are doubled into insurance and the reason is that if there is a loss that prohibits you from living in the house (e.g. a fire) for a period of time the policy covers your replacement lodging, unlike renters insurance that only covers your personal property, since if a rental is destroyed you don't have to pay rent for the destroyed property and can go rent something else.

Do not underestimate the tax problem -- the insurance problem is somewhat new, but the tax problem is not and I have seen it my own family.  My parents' home had two decades worth of potential appreciation destroyed by a rough tripling of the property tax bill over that period of time.  I warned them when it started that this was going to happen because it goes into the PITI amount someone has to pay to buy it (principal, interest, taxes and insurance) so if you take that tax increase and, for example, put it and the escalation rate into a calculation over, say, 20 years that increase is the imputed decrease in the value of the house!  That's exactly what happened and it destroyed all value add over two decades of time.

It can be worse if that ramp causes you to be unable to afford routine maintenance and a sinking fund for all the ordinary things that can and do go wrong in any house.  HVAC systems wear out as do water heaters, refrigerators, washers and dryers, roofs and similar, and that ignores the "oh crap!" surprises which occur too -- sewer or water service line problems, septic or well problems if you have them and similar.  The latter two are especially nasty if you're on private water and if they occur you need to spend that money right now or you might not be able to flush the toilet -- for real.

The basic issue is that a decade-long repression of interest rates, which was foolish and especially when Covid hit along with all the handouts into the economy has driven prices to outrageously-ridiculous levels, and for a financed transaction this compounds the damage.  But even for those who laugh because they owned a house before that and now have an alleged "big gain" the problem is that tax and insurance exposure goes up as fast (in one case) and faster in the other, so existing owners are not exempt.

In addition there is a huge fraud problem in certain markets with insurance, particularly (but not limited to) Florida, never mind places that are casualty-rich (e.g. mountainsides and similar where fire exposure is serious) but builders and planning commissions have done nothing to enforce constraints that significantly mitigate risk and buyers who continue to think said risk isn't real and drive up price, and at the same time they refuse to permit insurance companies to price said risk as it really is without making others who are not exposed to that risk eat it.  Nowhere in Florida was this more in evidence than at Mexico Beach where the homes on the beach were originally built as cinderblock disposable places as everyone who built them knew darn well a hurricane would eventually come and destroy it.  When they were literal vacation shacks nobody cared; if the interior got flooded you took the stuff out, got out a shovel and pressure washer, dried it out and there you go -- and if the storm was really bad you put up more cinderblock and a new roof on top of the poured slab which was all that remained after the storm but then the craze began and people took what were $100,000 cinderblock places where $50,000 of that was the nice sand beach you had and tarted them all up into very nice and expensive places that someone was willing to pay a million dollars for yet had the same risk of being destroyed by said storm as the base risk to that structure had not changed at all!  Then the storm comes and...... they're gone.

How can this be addressed?  Realistically there is only one way: Prices have to crash, meaning down by half or more, and remain there.  That will of course cause insurance costs to crash as well, although on the property tax side the resistance of state and local governments to cutting their budgets back will remain severe.

The insanity coming out of "financial media" on the GDP report is amusing -- but not surprising.

Real gross domestic product (GDP) increased at an annual rate of 1.6 percent in the first quarter of 2024 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2023, real GDP increased 3.4 percent.

Here's the basic problem in this report -- the last three reports are a declining trend and the Q3 2023 number looks like a pull-forward rather than an acceleration in growth, as the overall trend from Q3 2022 looks like those two interim reports were people having "one last party."

The increase in consumer spending reflected an increase in services that was partly offset by a decrease in goods. Within services, the increase primarily reflected increases in health care as well as financial services and insurance. 

Health care and insurance are not discretionary purchases and this is extremely bad news economically as it wasn't absorbed; it  came out of everything else.

Oh, and as for inflation?

The price index for gross domestic purchases increased 3.1 percent in the first quarter, compared with an increase of 1.9 percent in the fourth quarter (table 4). The personal consumption expenditures (PCE) price index increased 3.4 percent, compared with an increase of 1.8 percent. Excluding food and energy prices, the PCE price index increased 3.7 percent, compared with an increase of 2.0 percent.

ALL of these figures, including core, are well above target -- in fact, approaching double said target.

These are extremely hot inflation numbers and they're in non-discretionary purchases which nobody can get around and extremely sticky too as car insurance is typically a six-month term with property insurance renewing annually.  There are lots of reports of 20% increases in insurance costs for autos and homes -- and in many cases they're actually higher, and this is among people without any claims.  I'm seeing it here, and I'm not in a high-risk area.  If you are, or in a place where various government policies have driven up loss rates (e.g. uninsured motorists) then you may be looking at doubles and again, no insurance means either no driving or running the risk of driving on a suspended license which, when you get caught, will mean SR-22 policies to get reinstated (and don't ask the price -- its eye-watering.)

If you're still in the camp that rates are coming down this year you're wrong.  No they're not with price indices going up like this, and yet that has been the mantra for the last six months+ in the asset markets.

I'll take the under on that and that nice, safe 5%+ in the short end of the Treasury curve looks real good compared with a likely 30%+ loss in equities or (much worse, due to it being illiquid) Real Estate.