How builders are dealing with Austin's Land Code NOT Changing

Question

Hi all - I'm a real estate agent working with several residential developers here in Austin. Austin was set to change the city-wide zoning code. The result would have been to re-zone basically the entire city with new designations that would have allowed for greater density housing and shorter approval times for developers. However a legal case has held up this process and it appears there will be a 12 month pause put on the whole process while the city considers appealing the court's decision.

So - how are my clients (residential developers) dealing with this delay?

1. Builders are holding on to assets that will be re-zoned

While this delay is less than ideal, the lots that I have helped my clients acquire are still expected to be re-zoned whether or not the City's appeal is successful. If the city loses their appeal, they will most likely re-write the code to make adoption at the discretion of each individual property owner.

2. Builders are looking to acquire lots that are profitable under the current code

Residential home builders are looking at everything that is currently on the market and focusing on projects that can be built now under the current code. Many of them can't wait 12 months for the code to change before they can start turning over new projects. Instead, they're going hard after acquisitions that can work for Main House + ADU or smaller Duplex builds. Anything that doesn't require a re-zoning.

3.Lenders are confused

Hard money lenders are going in different directions. IMO they should be reducing rates and trying to originate as many loans as possible. But instead, they're being risk-averse and some have even put their rates up thinking that access to capital is so bad that they can afford to price gauge.

4. Investors have a very small high-upside window

Because hard money lenders are running scared, new residential construction in Austin represents a fantastic short-term opportunity for real-estate investors. Some of the projects we're analyzing right now are showing 30-40% gains for 9-12 month investments. Feel free to email or reply if you're interested in hearing more about these.

Aidan Mosher · Answer

As a lender, I have to push back on this. Lenders are not price-gouging, they are working with what they have. It is simply a supply and demand issue. HM rates have increased for the exact same reason conventional and government backed rates rose after the initial refi boom last month.

Purchasing of mortgage-backed securities has dropped dramatically. In that same vein, the buyers of HM notes on the secondary markets have disappeared at a much more alarming rate. The buying of these notes is what creates the liquidity that all lenders rely on to originate loans.

When the capital markets that fuel this industry freeze, there is just not enough money to continue business as usual and definitely not enough to cut rates. The opposite must happen: There is no new money coming in so you have to work with whatever you have.

If a lender generally has $10mm/month to put to work and they suddenly have $2mm, then they have to charge more for that money. As we've already seen in Austin with businesses rapidly shutting their doors forever, businesses simply can't survive on a fraction of their revenue for an extended period of time.

How builders are dealing with Austin's Land Code NOT Changing

1 Reply