What the Fed’s first rate hike since 2023 means for Nashville’s housing market

The Federal Reserve has raised its benchmark interest rate for the first time since 2023, a move that could reduce homebuyers’ purchasing power.

Madeleine Nolan · WZTV

NASHVILLE, Tenn. (WZTV) — The Federal Reserve has raised its benchmark interest rate for the first time since 2023, a move that could reduce homebuyers’ purchasing power, slow new construction and place more pressure on Nashville-area sellers.

The Fed increased its benchmark rate by a quarter of a percentage point as it works to bring inflation back toward its 2% target.

Dr. Julio Rivas, a professor of finance and economics at Lipscomb University, said one sign of continued inflationary pressure can be found at the gas pump.

“If you drive down the road and look at gas prices, they’re still elevated,” Rivas said. “And if fuel prices and energy prices continue to be elevated, that’s going to have an effect on the whole economy.”

Rivas compared the Fed’s decision to applying the brakes to a moving car. By making credit more expensive, the central bank hopes to reduce demand and slow price increases.

“The purpose of every time the Fed increases the rate is to reduce demand,” Rivas said. “They’re trying to put, like, brakes, like you’re in a car, you’re driving, you hit the brakes. They’re trying to do that with the economy.”

That does not mean mortgage rates automatically increased by a quarter point following the announcement.

Mortgage rates are influenced by several economic factors and often adjust before a Fed decision as financial markets anticipate what the central bank will do.

“We were expecting a Federal Reserve rate increase, so mortgage rates had actually already increased prior to the meeting,” said Christi Wedig, a senior loan originator with CMG Home Loans.

Wedig said mortgage pricing showed slight improvement after the announcement, underscoring that the federal funds rate and mortgage rates do not always move together.

Still, borrowing to purchase a home remains expensive. The average rate on a 30-year fixed mortgage reached 6.95% Thursday, according to Freddie Mac, up from 6.76% one week earlier. It is the highest average since January 2025.

Homeowners who already have fixed-rate mortgages will not see their existing interest rates or principal-and-interest payments change.

“If you already have a mortgage and you have a very good rate, well, that’s not going to change for you if it’s a fixed-rate mortgage,” Rivas said.

The impact will be felt more directly by people applying for new mortgages. Higher rates can increase the monthly payment on the same loan or reduce the price of the home for which a buyer qualifies.

That could present a particular challenge in Nashville, where home prices remain relatively high.

Rivas said higher borrowing costs could also make builders more hesitant to begin new housing projects if they are uncertain whether buyers will be able to afford the finished homes.

“As rates go up, that is a motivator for builders not to build,” Rivas said. “There’s more uncertainty in whether they will be able to sell the houses or apartments that they build, so they’d rather wait.”

Slower construction could further restrict Nashville’s housing supply. Homeowners who secured mortgage rates below 4% may also be reluctant to sell if moving would require taking out a new loan at a much higher rate.

Despite those pressures, Rivas does not expect Nashville home prices to decline significantly as long as the region continues attracting new residents and businesses.

“As long as more and more people continue moving into Nashville, more businesses continue moving here, there’s going to be demand for housing,” Rivas said. “That’s going to keep prices elevated.”

The rate environment may also create an opportunity for buyers who remain qualified.

Wedig said Nashville currently has more housing inventory than it did during the market’s most competitive years. With some homes sitting on the market longer, sellers are being forced to price properties more realistically and offer incentives.

“Because rates are higher, this is actually a benefit for buyers because sellers are offering concessions,” Wedig said. “We’re using those concessions to push the rate back down.”

Seller concessions can be applied toward closing costs or used to buy down a buyer’s mortgage rate. Wedig said buyers should focus on whether they can comfortably afford the final monthly payment instead of looking only at the advertised rate.

“Interest is important, but really what matters is: What’s your monthly payment?” Wedig said. “Can you afford the payment, and can your lender help find a strategy to get you there?”

Wedig described Nashville as a healthier, more balanced housing market than it has been in recent years. Buyers may have less purchasing power because of higher borrowing costs, but those who remain in the market could have more time and leverage to negotiate.

The longer-term effect will depend on whether this is a one-time increase or the beginning of several rate hikes.

Rivas said one quarter-point increase may not dramatically change Nashville’s housing market overnight. Additional increases, however, could place greater pressure on buyers, sellers and builders.