Welcome to the Skeptical Investor Newsletter. A frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

This week, we’re talkin’ a big change at the Fed that will affect real estate, interest rates and beyond. Not many folks are focusing on this.

Let’s get into it.

I’m about to catch a flight out of Nashville to a far off land to… well, why ruin the surprise?

So, I have a hot take.

Mortgage interest rates are going to levitate from here.

At least for the next few months.

This, after the Fed announced changes to its balance sheet (aka assets - mostly debt - it bought back in response to COVID to stimulate the economy).

And boy did they ever get that ol economy movin. In fact, it’s one reason why home prices leaped up 2020 through 2021.

Why?

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Bonds? Not much better.

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The Federal Reserve announced on October 29th that it will conclude the reduction of its aggregate securities holdings effective December 1, 2025. In other words, in 2 weeks the Fed will end aggregate quantitative tightening (QT), a policy initiated in July 2022 to shrink the Fed’s balance sheet from its pandemic-era peak of nearly $9 trillion. QT involved allowing a capped amount of Treasury securities and mortgage-backed securities (MBS) to mature and roll off their balanace sheet, without buying more, effectively removing liquidity from the financial system. The Fed balance sheet has already contracted by about $2.4 trillion, now standing at roughly $6.631 trillion.

And now, the Fed has seen enough. They are going to maintain ~$6 trillion in holdings. No more reductions.

The move comes amid rising short-term funding costs and signals from money markets that liquidity is tightening.

However, the end of QT isn’t a simple halt—it’s structured in a way that maintains the overall balance sheet size while altering its composition. And it’s the HOW they do this that will have an adverse effect on the real estate market.

Anticipating this policy change, the bond market is already selling off, driving mortgage interest rates up .15% in the last 30 days.

But why?

I’'ll get to that. But first, a primer.

Quantitative easing (QE), QT’s counterpart, involved the Fed purchasing Treasuries and MBS to inject liquidity, lower long-term interest rates, and stimulate economic activity. During the 2008 financial crisis, after the crisis and then again for COVID response, QE ballooned the balance sheet from under $1 trillion to nearly $9 trillion (much of this done for COVID response, which is frankly insane).

Then, as inflation raged, in June 2022 the Fed implemented QT, reversing their buying frenzy.

The historical trajectory of the Fed’s balance sheet illustrates this expansion and contraction:

As shown, the balance sheet peaked during the pandemic and has been declining through two phases of QT, shedding trillions in assets.

Starting December 1, 2025, the Fed will cease shrinking its Treasury holdings (QT), reinvesting/repurchasing maturing Treasuries to keep its overall holdings stable.

However, a massive rebalance will start to take place.

While the $ of Teasuries will no longer decrease, the Fed will contiue to reduce it’s MBS holdings, using those proceeds to purchase new Treasury bills. This shift has direct implications for mortgage interest rates, and is likely to not only keep them elevated, but should push them higher.

Roughly 1/3 or $2.069 trillion of the Fed’s balance sheet is MBS, which much of the rest, 4.192 trillion, US Treasuritses (as of 11-13-2025).

In other words, the Fed is about to embark on a new campagn to unload a massive $2 trillion supply of mortgages into the secondary mortgage market for purchase, driving down their price, as well as the appetite for investors/institutions to purchase them. At the same time, they are going to take their Treasury holdings up 50% from $4.2 to 6.2 trillion.

Wow.

In other words, the Fed is really starting QE by buying US Treasuries and continuing QT by rolling off $2 trillion in MBS.

So QT really isn’t “ending” at all. As with much in life, the devil is in the details.

The Effect?

Critically, a $35 billion monthly cap on MBS runoff appears to be effectively removed, meaning the Fed will be able to more quickly get the MBS off their books, especially if prepayments surge (ie, when a person sells a home with a mortgage or refinances their existing mortgage). This aligns with the Fed’s long-term goal of holding a portfolio dominated by Treasuries, reducing its footprint in the mortgage market.

This is a good overall goal for them to have. They don’t need to be in the mortgage business unless there is a market in crisis.

BUT, we have wildly high interest rates, so is it the right time to do this?

No. No. No…in my humble opinion.

This is not the time to put upward pressure on mortgage rates.

We are in year 3 of recessionary-level housing sales activity because of high interest rates, which was driven by inflation that the government, including the Fed, caused!

Case in point, just look at the Fed getting into the game of buying mortgages.

The wild thing about this MBS holdings chart?

They just kept buying mortgages, even after the Great Financial Crisis and COVID response was done.

They didn’t need to. The mortgage/housing market was going like gangbusters.

But they did.

IMO, this is a primary reason for housing price inflation far exceeding overall inflation.

Remember, mortgage rates are primarily influenced by the 10-year Treasury yield, plus a spread that accounts for credit risk and market dynamics. The Fed’s QE historically compressed this spread by directly buying MBS, supporting demand and lowering rates. QT reversed that, widening spreads and contributing to higher mortgage rates.

With QT ending but MBS runoff continuing without replacement in MBS, the Fed is withdrawing as a buyer in the mortgage securities market. This could keep mortgage rates levitating or slow any downward trajectory, as private investors must absorb the supply. If mortgage rates fall (e.g., due to further Fed funds rate cuts), refinancing could spike, increasing MBS prepayments and accelerating runoff. Further, without the $35 billion cap limiting this, excess supply hits the market, potentially widening spreads and pushing rates back up—a self-correcting mechanism.

Analysts project that ending QT overall might ease bond yields slightly, but the targeted MBS runoff could offset this for mortgages, leading to rates in the mid-6% range rather than lower.

Stabilizing the balance sheet injects liquidity back into markets, potentially boosting asset prices like stocks and crypto, as seen in historical QE periods. However, for housing, the impact is less bullish. Homebuyers facing sustained high rates may see slower affordability improvements, dampening demand. The Fed’s pivot to T-bills also eases short-term funding pressures, but it doesn’t directly lower long-term rates that anchor mortgages.

If inflation reaccelerates or economic data softens, the Fed could adjust further—perhaps resuming MBS purchases—but current signals point to a neutral stance.

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Ok, back to business.

I’ll keep it short, as I’m about to catch a flight to…Hamburg Germany. And my german is pretty damn rostig!

Scheiße.

The Fed’s overall QT is logical and warranted, both for liquidity management and to normalize their intervetion in bond market forces.

But.

They really aren’t simply ending QT. It’s starting QE for Treasuries and continuing QT for mortgages.

Many are hoping that their co-effort to lower overall Fed Funds interest rates would bring lower overall interest rates.

Unfortunately, by continuing QT for MBS, the Fed won’t deliver the mortgage rate relief many are hoping for.

In fact…

The Fed’s dual QE/QT actions prioritize portfolio normalization to the detriment of housing market support.

This will keep mortgage rates higher for even longer.

I still do think we are on a path trending downward for interest rates but this action may mean a 6-12 month pause on that momentum. What remains to be seen are how fast the Fed rolls off the MBS, what maturity of Treasury bills they buy to replace them, and how fast they cut overall interest rates (Fed Funds).

A small adjustment in either of these will drastically affect mortgage rates, and I hoep the Fed can find a good way to manage through this effort.

If I had to put a number on it, I’d say we are below 6% 30-yr mortgage rates near the end of next year, and our terminal % resting place will be ~5.5%. Long term.

But don’t quote me :).

Until next time. Stay Curious. Stay Skeptical.

Herzliche Grüße,

-The Skeptical Investor

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