We are starting to see the fruit of regulatory easing: Terrazas

today we got housing starts data that was kind of mixed. Frankly, we saw an increase in the number of housing starts UH to housing starts the fast pace in about decade, but the number of applications for permits declined. Joining us now to talk about the state of the US housing market is Aaron Terrazas. He is a Zillo Xenior Senior Economist Zillo Senior Economists. UM, thank you so much for being here. Aaron, So, whoops your take on this sort

of mixed data. You're right, it was a mixed report, but I think there was good news and that we are seeing a single family starts steadily rebound. There there nowhere near what we would expect at this point in the business cycle. Multi family starts have actually been a bright spot. Um. Those apartments five plus unit buildings UM. They dropped a little bit in twenty seventeen, but have

been up over the past year unexpectedly, still strong. What accounts for that strength up seven and a half percent? That's right, you know, I think there's a couple of factors driving that strength UM. First, as rent affordability really began to deteriorate two or three years ago, UH cities, particularly high press high price cities, began to invest in easing the regulatory process UM, and now to three years later, we're starting to see the fruit of that kind of

regulatory easing. Really, although I thought that the big gains were really in the Midwest and some cities where perhaps that wasn't as much of an issue. You're right, So so the Midwest has seen the most recent month and month gains, but you're looking over the past year, kind of the West and the Northeast have still seen strong multifamily starts. Have you seen any effects because of the rise and lumber prices, tariffs on imported lumber from Canada,

for example, You're right. In the single family space, the single family construction in particular, tariffs and and kind of recent trade actions have increased costs for builders. I heard an estimate of about nine thousand dollars at home, right, so that's kind of in line my estimates attend to fifteen tho dollars for your median new home. UM. That adds, but it's important remember it's not just softwood. Softwood is the biggest particular component that's been tariffed, but things like cedar,

shingles um have also kind of received teriffs. UM, Things like aluminum and and still are about three percent of the diciplical costs of your single family home, not too much of consumer appliances like washing machines and dishwashers. So, you know, just to pick up on on that that important point. The cost of the actual materials has been increasing, but so have the costs of the labor because there's been a real shortage there. How much has that contributed

to an increase in home prices as well? You're right number two of the rising cost the headwinds and builders are facing. Residential construction wages are up five percent over the past year compared to a liver two percent for overall wages. We're seeing double the pace of wage growth in in kind of for those residential construction workers. That's a clear sign of any that that builders are facing labor shortages. So at what point will these increased costs

materially slow housing starts. I'm not sure they're gonna they're slow housing starts. What they are doing is they're pushing up UM, the price point that that builders are targeting. So you know, we are seeing that that median price point of new construction rise UM and UM and you know, and kind of a little bit of is that is what we're not seeing I said before at this point in the business cycle, we should be seeing more housing starts. Okay,

this is what confuses me. The biggest earth of housing right now is sort of smaller starter homes. It's the affordable homes that people want to buy. If you have builders basically having a disincentive to go out and buy and and create these homes, you know, is there enough of a market at the high end, first of all, to absorb what the builders want to build and can

they afford to build what is actually needed? I think builders builders have that that same concern that that's one of the reasons there the remaining cautious If you look at UM new home sales, about a third of new homes are sold before they even started. That's up from historically about means builders are offloading this risk that they're carrying UM rather than wait for a couple of months

of appreciation while construction finishes. I think kind of builders today are do have that scars of what happened a decade ago and are being conservative UM, not wanting to overbuild UM. They know there's demand at that more affordable price point. The math doesn't work out for them there new home sales. Just to get more color on that topic, what's your outlook? So our outlook new home sales data will release next week. Are our forecast suggests? I think

a small decline. You know there is some month to month volatility in that series. I think the more important point that I'm looking at um next week next week's data is that that medium price point. Last month in the provisional April data, we saw a big drop in that medium price point. I think that's gonna be revised upward. One thing that really struck me there was a story on the Bloomberg Today looking at a Harvard study that found that US homes are a lot cheaper than they look.

And they looked at an inflation adjusted basis, The monthly payments that people are making now in their homes are actually blow what they would be in seven This is all thanks to low interest rates. So you know how much does that factor into people's equations right now? Lock in the low interest rates while they are where they are, and that will actually mean a cheaper home now, even if prices are pretty high. Nation Wide, home affordability looks

great right now. You know it's it's in the low twenties. Your your your your typical mortgaged income ratio. So much of that is driven by interest rates. As interest rates rise, that's gonna kind of push that in abruptard. But you know, if you look at that historical average share of income that goes to a mortgage, that's that's assuming an average historical mortgage rate of eight percent. I'm not sure that mortgage rates are going to get up to eight percent,

even at their highest point the cycle. Just to go back to this idea of rent affordability, looking at specific cities where it is affordable to rent, Pittsburgh number one. St. Louis, number two, Oklahoma City, followed by Raleigh, Birmingham, and so on. What do you see in terms of any trends for big cities. Yeah, so so. Rent affordability is almost the opposite of the mortgage affordability story. It is at historic

highs um particularly in in those high priced cities. In a place like San Francisco, l A. People are spending kind of almost fifty of their income on rent. That's at the median for a bottom a bottom third renter, kind of renting a bottom foot house. It's it's which is just just not realistic, But you're right. Kind of there are kind of those more affordable cities, um where there has been more supply and you know, more importantly kind of less demanding that rental market because it is

still affordable to buy in places like like Lahoma City. Um, you know, people in those markets tend to buy as soon as they can. Thanks very much for being with us. Aaron Rossis, he is the senior economist for ZELLO, talking about new housing starts and the housing market. China is planning to act quote forcefully on Trump's two hundred billion

dollar tariff threat. President Trump's administration is drawing up a list of perhaps new tariffs to impose on China to retaliate for the retaliation to the retaliation to the retaliation. Here we are in this cycle, and here to explain to us how to strip out what we should be paying attention to from the noise. Patrick Chauvinik Chavannic. He

is chief strategist of Silver Silver Crust Asset Management. Patrick, you know, when you talk to a lot of traders, they say, there's a lot of noise, there's a lot of threats, but the actual economic impact so far is fairly minimal. At what point should people take up their their pens and say, wait a seconds, something here is vastly different. So there is a steady march from words to actions, and we are starting to see more and

more of these words translated into actions. Um, it's incremental, You're right, Um, but UH, you know, I look at it. There there two sets of effects. There's the short term effects UM that may affect uh this market cycle or how stocks perform in the near future, and that is UH the potential impact of of inflationary shock from more

expensive inputs like from steel. UH. And then also the retaliatory impacts measures that are meant to target specific companies or specific industries in the United States and hit their earnings. But there's also a longer term impact, which is the erosion and the undermining of these trade rules, which, however imperfect that they may be, have created a lot of opportunity, not just for American companies but from for companies around

the world. And you know, there's something going on right now at w t O where the United States is refusing to allow new judges to take up their roles at w t O, and very soon we're gonna get down to where there's only three judges, which is the minimum required um to have any kind of ruling, and then we'll go to two and they won't be able to rule on anything. So you have countries like Canada or your European Union who say, well, we don't like what the U s is doing, we're gonna take it

to w t OH. If they can't take it to w t O because the US is blocking that, they're going to be adopting more unilateral actions. And this what we're seeing here is a situation where the temperature just keeps rising and rising and rising, and the actual economic impacts start to accumulate. Patrick. Let's say you get a call from a client and they say, look, you know you taught at a university in Beijing, shin Khua University. Also,

you've worked in private equity. You worked for John Bayner because you've got a political acumen there, and you also have worked in public policy. Where do we put our money today? How can we take advantage of people following headlines going in one direction? Maybe that's a head fake. Let's assume that that's how we see it. Where do you put your money? If you bet that the demographics

of emerging markets, particularly in Asia can be your friend. Okay, well, you raise a bigger question about sort of globally, you know where growth is going to come from. Let me let me answer the immediate question that that people are asking me about about all this kind of trade headlines.

And the thing that I've been saying is, look, there are there We're already seeing in markets, um a disparity and performance between the smaller caps and more technology focus firms which are not exposed to uh these sort of trade disputes, and the larger caps. Many people ask me, they say, when is when are these trade issues going to start affecting the markets? I'd say they've affected the markets throughout the year. We've had excellent economic numbers. Um,

we had a great earning season. In the first quarter, we had six in May we had retail sales were up six percent year on year. And and in the face of all this though, we've got flat markets, particularly in large caps. So you're making the argument of small caps versus large caps, and the small caps have outperformed

by more than twice the large caps. The question is, and a lot of people will argue this is uh messy, a messy analogy, and that you know, small caps will eventually feel the brunt of any economic downdraft that the large caps are reflecting. Yes, so, so there are the broader concerns that you know, if we have inflationary pressure rising, if we have retaliation that doesn't just target a few companies that actually has a broader economic impact, everyone's going

to feel that. But for the moment, right there is that disparity between We can't ignore the good economic news. I mean, I'm as alarmed at the headlines and the potential impact that they might have as anyone else, But I also look at numbers that the market on a bad day like this tends to ignore, which is that retail sales up six per year on year expectations of three to anywhere from three to five GDP growth in the second quarter, and you can't ignore that either. So

where are you going to pick up? Where are you going to maximize your exposure to that good news and minimize your exposure your to those potential risks. So you're buying small caps on a day like today, Uh? I would I mean, we manage whole portfolios. So what I would say is you want to have that in mind

when you're thinking about your asset allocation. All right, I do want to get a sense of your take on China strategy here, giving your intimate knowledge with the Chinese government and how they approach things, it seems as if there is a very deliberate targeting of areas that voted for President Trump. This is the sort of farm belt, uh, and sort of the steel country. This is where you're

seeing the tariffs. Put first, Does this matter to markets or in other words, this definitely has sort of political overtones with respect to what the midterm elections might look like. If China is effective, does it? Do you care from a market perspective? Sure, because you know it's it's not a stock market, it's a market of stocks, and so you want to be aware that these retaliatory measures are going to be targeted at specific company some specific industries.

And it's not just China, by the way, uh it is also the EU, Canada, Mexico. They're all crafting their retaliatory strategies to try to maximize the political lever. So, for instance, Mexico is putting a big tariff on cheese exports from the United States, about four million dollars worth. So if you're an investor, you have to, you know, go bullow this. We're not passive investors, were active investors, So we're not looking at the index. We're not just

looking at how the market overall is doing. We want to go and look at specific companies, specific industries and what their exposure is to these kinds of risks. Give you twenty seconds, if you could get on a plane and go anywhere to go investigate a potential investment in an emerging economy, where would it be? I go everywhere all the time. I just got you get to go once in Europe, Eastern Europe. Most most interesting me. That

doesn't mean that I'm bullish on it. I just it's I'm most curious about it all right, Well done, thanks very much for being with us. UH. Patrick Chavannic. He is managing Director, Chief a Strategist of Silvercrest Asset Management and you can follow him on Twitter at p R Shelvanic. That's h O V A n EC Right now. I am very excited that we have David Carrington with us. He is Jefferson County Commissioner UH and he joins us here in our eleven three oh studios. David, I want

to start with a little trip down memory lane. Jefferson County is known in the bond world for its two thousand and eleven bankruptcy, one of the biggest in the minicipal bond markets history in the US. I'm wonder rink today as we see some of the struggles with Illinois and Connecticut, would you recommend that they go down the same path that Jefferson County ultimately had to pursue. Well, it's surely a last resort. It's not something that you

want to do flippantly. UM. I continue to say that after a year in negotiations, we had three gallons of water and a one gallon bucket, and it didn't look like we were going to go a larger bucket, and we couldn't reduce the water, so we had to do it. UM. The financial situation was one that was apparently unsolvable. With that said, before I municipality entertains Chapter nine bankruptcy, they have to first seriously try to negotiate their way out.

They need to recognize it's very costly. In our case, it was a million dollars a month. We were projecting thirty six to forty eight months. It actually we were able to exit in twenty five months. You have to be sure that the elected officials have the political will to make the decisions that have to be made in order to restructure UM the organization, and so UM I would not recommend a community do this unless they have an elected UH a group of commissioners or counselors or

senators that are willing to take the political heat. I was told UH that if I UH file for Chapter nine bankruptcy, my political career would be toast. And my answer to that was, I didn't run to get re elected. I ran to fix the problem. So you almost have to have a mindset that this is UH something that you don't want to do, but you have to do in order to make the community sustainable going forward, and

just a quickly side of recap. In Jefferson County, Alabama, this goes back to there was a consent decree having to do with the city sewer systems. They needed to finance the revamp of the sewer system. They issued. Then it got really bad and there were lawsuits and several people went to jail, and it was none of which you are associated. And that's that's true. The day I walked in the office was November the tenth of two ten. We had three point two billion of sewer deet in default.

We had a sewer receiver appointed by the court, so that was gonna double rates and then double them again or g that was in default. Our audits were three years past due. We had an indigent care hospital losing ten to fifteen million dollars a year, a county home losing two to three million dollars a year. So to say it was a mass is sort of an understatement.

And uh then on our twenty second day in office, a circuit court judge ruled that a tax that had been passed for the county's general fund was passed illegally by the state legislature, and we lost twenty of our revenue. So that was our twenty second day. And then on the last day of our first year in office, we followed what was at the time the largest municipal bankruptcy in US history. A year or two later, Detroit rallied and surpassed us. And I've always been thankful for Detroit

for doing that. I'm sure that UH Detroit says you're welcome. I want to switch gears a little bit because fast forwards today and Birmingham is actually attracting some businesses from places like New York and UH, New Jersey and Connecticut and higher tax states. Um, to what degree have you seen these businesses come? And UH, you know, are you seeing it accelerate? Yes? Uh in the last seventeen months, uh one to three, four or five, six, seven, eight nine, Well,

there's been eleven companies relocate into our community. And of course the states doing well too, with the recent announcement of Toyota in the Huntsville area. We have Airbus in the last several years in Mobile, UH the Birmingham metro area actually, in a recent Forbes report, UH has pays the highest salaries in the guide states. Well might shock people in New York, but when you combine our salary plus our cost of a living, the dollar buys a

lot more in Alabama. And so we're a low tax state with a high work ethic, and we have not suffered as we were suggested with the bankruptcy. We now have investment grade ratings on our GEO debt UH, and we were told that would never happen. We just refunded some debt in the last week last month at two point five saving the citizens fourteen million dollars. And we have redeployed that capital because we have a thousand fewer employees today than the day I walked into the office,

so our expense structure is a lot lower. We've allocated twenty five million dollars a year for infrastructure so we can attract it, eighteen million dollars a year more for our public schools, and ten million dollars a year UH for economic development. So on top of tax in centers which most people used to recruit businesses, we also have a bundle of catsh that we can invest. We just UH opened a truck manufacturer. It's a custom truck UH seven fifty jobs and we needed about a million and

a half dollars for some infrastructure work. So instead of borrowing the money, we now have a pool of assets that we can use to do that. Like I said, it's ten million dollars a year. It's a twenty five twenty five year attack. So we've got a quarter of a billion dollars to recruit and when we need a little bit more, be it for a road or a bridge, we can do that. Thank you very much for being with us. Looking forward to having you again on the program.

Very interesting topics and thanks for your participation. David Carrington, Commissioner of Jefferson County, Alabama. Rebates and drug Pricing. Here to tell us more about the industry is Michael Ray. He is the chief executive officer of our X Savings Solutions. They're based in Overland Park, Kansas, but he joins us here in our eleven three OHD studios. Michael, always a pleasure, thanks for being here. Explained to people that may not be familiar with the use of rebates when it comes

to purchasing drugs and how it has changed. Yeah, so rebates kind of think of them like a kickback of sorts. You pay a hundred dollars for the drug. Uh, the negotiated price might be eighty uh, and there might be a twenty twenty rebate on top of it, so that the actual total costs in that scenario is is sixty dollars. It's kind of this, uh, like I said, kickback of sorts that that goes back to a pair. Why does

this exist? That's a great question. We live in a very complicated world when it comes to drug pricing, and the mechanics of how money moves has gotten more complex over time. It originally, uh, you know, was a way to give an additional discount to the payer, but what's happened is it's been manipulated over time and profits have have gone up extraordinarily for certain folks in the supply chain. Well,

we certainly, Uh. One of the reasons why we've been paying closer and closer attention to this is because it's become a political issue. And then the administration has said we're going to reduce drug prices, and in response, some of the shares of these big pharmaceutical companies declined. What is the latest with respect to the administration's policy to try to lower drug policy prices? Yeah, I haven't seen anything, you know, really interesting since the you know, the announcement

by President Trump probably four weeks or so ago. I did hear some or excuse me, see some testimony from Secretary is Our last week that was focused on getting rid of rebates. And I think if there is a single thing that can happen to lower drug prices, elimination of rebates is that thing. It is that important. And there is a tremendous amount of money changing hands. So just how much would that hurt pharmaceutical companies? I mean, clearly they're I'm assuming they're the ones that are pushing

to keep these rebates correct. Yeah, you know, I actually think that that pharma could come out better off if these rebates go away. I actually, uh am of the belief that they should be the ones proposing this. They should be uh they should join together as a trade group and say we're not going to participate because the benefit, financial benefit that they received at the beginning has been taken away. And I actually think that more competition would

would yield a better result. Can you give us an update on what is going on with generic drug pricing? Because there was a list that the FDA put out that side of a variety of pharmaceutical companies saying that they were doing just about anything they could in order to avoid giving the information necessary to other companies to produce generic versions of their patented or their branded drugs. And yet it seems as though generic drug prices have

been increasing, not decreasing. It's a it's a tail to two situations. You've got you've got some pharma companies blocking, like you said on the on the patent piece, so that generics cannot be made, the first generic cannot be made. And then you've got other products in the market where you know, a hundred ten different manufacturers make a specific

generic drug. In those situations, you're seeing more and more you're seeing consumer prices go up, but generic drug maker stock prices go down, and there's this mysterious pot of money in the middle that no one seems to know where it goes. So you know, lower lower, lower stock prices,

lower profits, but higher cost to the consumer. So I'm wondering, especially given some of the focus on generic drug prices and how they've been going up, I'm wondering this year's record pace of pharmaceutical mergers and acquisitions is going to play into drug pricing. I mean, is this going to end up uh leading to more price increases because you're getting consolidation of specifical sectors of the industry or do you think that it might absolutely? Um, depending on the

products right. So um, you know, if there's three or more competitors in a class, you're gonna get you know, you're gonna get a pretty efficient market. If you've got manufacturers emerging that you know, have the two products on the market and they emerge into be the single single company, that's not going to bode well for payers and consumers in this country. Are there specific drugs that you're starting to see inch up in price because of consolidations? Nothing yet?

And I just just only because I have attracted you know, uh in looking at what you're doing at r X Saving Solutions, I'm wondering if you just give us an example. I know, for example, you work with the State of Kansas. They've got their employee health benefits plan. What do you do for them? And what has been the result? What why are they using you? Yeah? So um, you know, to give you a kind of an example, think of a patient with high blood pressure and they go into

the doctor. The doctor diagnoses it and says, we need to put you on this therapy um right now. They're choosing and they're kind of shooting in the dark. It's you know, there's forty choices, and they pick one, and they don't know if that's a high cost one or a low cost one. What we do is present all of the information to the consumer and the doctor to say, here are your forty choices, and here's every price that

goes with it. That allows a consumeristic decision to be made, and it allows a consumer to take hold and consume a real efficient market to take hold and drive down costs while increasing outcomes because that patient actually has a drug they can afford and they can fill and they get healthier. So they brought us into lower prices and that's what we've done for them. Thank you so much

for joining us. Always eliminated to speak with you. Michael Ray, chief executive officer of our ex Savings Solutions, talking about the latest in UH the effort to lower drug prices. Really interesting about the rebates and a really interesting point Pim that Michael thinks that if you do get rid of the rebates, that actually end up ends up being

beneficial for the pharmaceutical companies. Well, maybe if you simplified things and didn't create all these tangled webs, you'd actually be able to see what you can pay for a drug, and you wouldn't have to have a million intermediaries trying to figure it all out. Oh you mean that's common sense. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm

on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio