ICYMI: US Housing Market Awaits Interest-Rate Clarity

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2:12Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Business Week with Carol Masser and Tim Stenevek on Bloomberg Radio. Well, D.R. Horton now with earnings rallying as much as 15 percent and a top gainer in the S &P 500. From the Oval Office today, the president took a question asking about the possibility of having no tax on capital gains on homes. and the president said he's thinking about it. It would also unleash you just by lowering the interest rates. If the Fed would lower the rates, we wouldn't even have to do that. But we are thinking about no tax on capital gains on houses.

2:50No tax on capital gains on houses, Carol. Sign me up. I knew you were going to say that. Sorry. So you just sell the house, keep the money, and then, yeah, where are you going to live? It's okay. You've got to buy another house then. Yeah, I hear you. Okay, well, let's talk housing in the U.S. back with us is Thomas Carroll, founder and CEO of Ballast Rock Asset Management. The firm's got about$600 million in AUM. It focuses on multifamily real estate and also on private equity. Thomas back here with us in the Bloomberg Interactive Brokers Studio. Welcome back. It's good to see you. It's been a while.

3:20Great to see you too. Thanks so much, Carol and Tim. How is the environment right now? Because the president has been on this lower the rates, lower the rates, lower this rates train for months. Is that preventing you from actually doing any multifamily building? Yes. In so much as the industry as a whole has been white knuckling, I would say, with an expectation of rates coming down. They've been white knuckling the sale of assets. We're primarily in the secondary market rather than developing specifically in multifamily. But you still have to do a lot of work to those multifamily homes. Absolutely.

3:58We're doing massive renovations. And so inflationary costs around that are material, etc. But yes, the rates environment has had a tremendous effect on the multifamily market. And until rates come significantly lower or sellers reprice in a material way, then it's tough for the market to get started again. That's what I wanted to ask you. If we just know, all right, the Fed's on hold because this is what what's the policy that makes sense for the next six to 12 months, then folks are going to do deals, right? It's like having some clarity because historically we're still at a lower rate environment.

4:34We've had much higher rates. And I guess my point is, are people just looking for clarity on what the policy is? And there's just between the back and forth between the white house and pressure on fed chair, Jay Powell and maybe folks thinking that that could ultimately lead to a higher, lower rates. I mean, that uncertainty, essentially, and at the same time, tariffs, which are putting another layer of uncertainty. So we just, the Fed doesn't know exactly what the environment's going to be. So they're on hold. So if at some point we have more clarity and the Fed says, nope, economy grown, we're doing good, Thomas, that then people say, well, this is the environment.

5:12So we'll reprice and we can do stuff and we'll move ahead. Sorry, there's a long way of saying clarity. Yes, indeed. Clarity would be extremely helpful. And perhaps you would have some owners be willing to transact again. However, a lot of owners still, you know, asset holders still have 2021 and peak pricing in mind. And so it's hard to let go. It's hard to reprice an asset lower, especially an income generating asset. So because they're income generating, you can hold on to them far, far, far longer than you would be able to otherwise, even if pricing theoretically should be lower if you were to sell.

5:53But you don't sell. You just hold onto it for years longer. But yes, hopefully greater clarity would be useful. But I would not say we're in a particularly clear environment right now. So clarity is not there. And so volumes in terms of secondary market volume for commercial real estate in general is substantially lower than it was at the peak. So what are you doing? Are you not buying anything right now? So we are not buying a lot right now. No, the only deals that we're doing are situations where the seller is genuinely in distress. So if there's not outright distress, it's very, very hard to make the numbers pencil.

6:30And what we're focusing on instead is actually where the big, beautiful bill has created a short term window of opportunity, which is solar development, interestingly enough. This is what I'm glad we're talking about this. It was in the notes. And our producer already said this on the phone. And I was thinking to myself, solar? Yeah, because the concern and we saw this play out in the public markets was that solar companies would get hit hard as a result of this bill. And they've been under a lot of pressure. Where are you seeing opportunity? They have been hit hard, and there is really very limited window for opportunity.

7:05So it's not great if you're full-time in that business. But for us, we're a private credit lender to solar developers that might have a 20 or 30 development pipeline of projects. And it enables us as a lender to step in on a senior-secured basis and identify and cherry-pick, really, the best, most actionable, immediately actionable projects where we can get shoveled in the ground right now and bring these projects to fruition, because very shortly, any investment tax credits are going to disappear. So it is about a short-term window. And for us, the opportunity is as a lender. Absolutely, this bill has been extremely problematic for the development industry and for generation of solar power in the United States.

7:51How short term and what are the terms looking like? So we need shovels in the ground this year or by the middle of next year if there is no foreign content. And we need completion of the project by the end of 2027. Some of the rules are still to be finalized, actually. The Big Beautiful Bill obviously passed on the 4th of July. But a week later, the Trump administration issued an executive order that the IRS has 45 days to clarify the rules. So interestingly enough, we're playing by a rule book that we don't fully have the details for. You talked about lack of clarity. Correct. It hits a lot of different areas.

8:30That's right. But there is opportunity there in the short to medium term for us to help those small to medium sized developers bring those rapidly deployable projects where we can get energy to the grid before the end of 2027. online immediately, but they need capital, and they're very profitable when you do it, and that's where we see the short-term opportunity in development. Then do these projects go poof? Well, no. The project will last for 20, 25, et cetera. But I mean new projects. That's it. If you have a 30-project pipeline, you might have five that you can bring to fruition. You might have 25 that go poof.

9:05All because of tax credits. Correct. Now, there will be major changes that are going to occur. The cost of construction for solar projects, the EPC construction costs are highly likely over time to come down because if there's less development going on, those construction companies will reduce their costs. So there'll be opportunities there. There will also be opportunities for states that want to continue to incentivize solar to step in and provide credits where the federal government steps out. And then finally, the utilities themselves, which at the moment use the interconnection fee and other aspects of solar development to make money, they will probably compress their margins as well.

9:46So there are a number of different moving levers. And then ultimately, the cost of electricity is going to go up. And that's going to be a huge driver of value. This is what I wanted to ask you. What are the projects that you are investing in? So the projects that we're lending money to are... Or lending to, forgive me. Exactly. For clarity, we're a private credit fund that lends money rather than investing equity. But those projects are below utility grade. They're what are called community solar. So they're usually in the 5 to 50 megawatt project size, whereas community solar really kicks, excuse me, utility grade solar kicks in above about 100 megawatts.

10:25Those projects, because they are much more challenging and time-consuming to execute, a lot of those have gone, to use your words, poof, because they can't be delivered in that time frame. So there is a massive change in the demand, as we know, for solar as a result of AI or for electricity in general. But now there's a material change in supply for the negative. Before we let you go back to your focus on multifamily, in the past, you've been on with us and you've spoken excitedly about the Sunbelt. Where geographically are you thinking for opportunity now? We continue to see a lot of opportunity in small to medium-sized cities across the Southeast, the Carolinas, Georgia, where these right-to-work states, where we're seeing a lot of new battery factories and other new factories being built.

11:21It's those small to medium-sized markets where we continue to see a growth in demand, an increase in wages, an increase in job opportunities, and we're there to do our best to support that with housing. How would you describe the economy? Just real quickly, 20 seconds. The US economy? Strong jobs market, but a lot of lack of clarity around issues such as tariffs and rates that make it challenging for long-term deployment of capital. All right. Interesting. So it sounds like potentially a lot of stuff sitting on the sidelines, just waiting for some clarity. We see that, certainly. All right. Good to check in with you.

11:57Thank you for coming in. Thank you. Yeah, appreciate it. Thomas Carroll, he's founder and chief executive officer of Ballast Rock Asset Management. joining us right here in our Bloomberg Interactive Broker Studio.

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