How interest rates change what housing costs: debt service, mortgage constants, cap rates and what a one-point rate move does to the rent a project needs.
Interest rates reach housing through two channels. The first is direct: a higher rate means a larger debt service payment on the same loan, and that payment must be covered by rent. The second is indirect: rates influence the capitalization rates investors use to value buildings, which changes what a finished project is worth and therefore how much equity a developer must raise.
Because financing is such a large share of a project’s cost, small rate moves have outsized effects. In our illustrative 100-unit building, each percentage point of interest on a 30-year loan changes the required rent by roughly $100 to $110 per month per unit, before any other input moves. Articles here quantify that relationship and explain why projects that worked at one rate can stop working at another.
Two loans, a handful of ratios, and one number that turns borrowed money into a monthly rent requirement.
Interest Rates
A one-point rise in the loan rate adds about $93 a month to the rent our illustrative 120-unit project requires, before investors and construction lenders reprice. We show the arithmetic and the second-order effects.
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