• Greg Richardson

What you missed in the market this week: tech earnings disappoint, mortgages to hit $4 trillion

This week Wall Street suffered its worst sell-off in months. An increase in cases of COVID-19, coupled with the assumption that a Biden lead in the polls means no stimulus plan until after the election, combined to spook investors. The Dow Jones Industrial Average dropped 964 points, or 3.4%, on Wednesday, its worst lost since June. The S&P 500 also suffered its worst loss since June, falling by 3.5%. The Nasdaq suffered a worse performance, losing 3.7% of its value, its worst session since the tech sell-offs in September.

Tech companies swooped in Thursday to help boost markets ahead of their quarterly earnings reports. The Dow traded 1% higher, or 300 points,with the S&P 500 and Nasdaq following suit with increases of 1.7% and 2.1%, respectively. That didn't last long, however, once the earnings reports were released. Apple reports a 16% decline in sales of the iPhone resulting in a 21% drop in revenue on the iPhone. Amazon, despite showing incredible Q3 sales, reported an earnings drop of 1.87%.

Those earnings caused Friday morning's futures to stumble with the Dow falling around 300 points with the S&P 500 and Nasdaq also starting in the red. The issue with the tech companies is that they essentially priced themselves out in September. Unless they had stellar earnings reports, they were bound to take a hit with how expensive they were trading. Of the FAANG stocks (Facebook, Amazon, Apple, Netflix and Google), it was Google leading the way this week in earnings. Alphabet, Google's parent company, is trading up 6% in the pre-market.

Thursday did bring some positive news in the form of GDP and unemployment. The Commerce Department reported Q3 GDP increased by 33.1%, the biggest post-WWII increase since we hit a 16.7% increase in 1950. The Labor Department's unemployment report was also better-than-expected with jobless claims falling to 751,000. Continuing claims also dropped again and now sit at 7.75 million total.

Treasury note yields performed better in early trading Thursday after Wednesday’s drop. The 10-year Treasury note yield jumped 5 basis points Thursday to 0.836%. After Thursday’s earnings reports, the yield dropped back slightly and was trading at 0.83% Friday morning. You can see in the chart below just how far the 10-year note yield has dropped over the last year and also see the slow grinder higher toward 1%.

Another piece of the earnings puzzle saw Fannie Mae and Freddie Mac reporting a combined net profit of $6.69 billion in Q3. This is a big deal for the government sponsored enterprises which have been working on capital raise as part of a plan to exit conservatorship. Of the various headwinds and tailwinds supporting the GSEs this year, one that might come to haunt them in the beginning of 2021 would be the end of the moratorium on foreclosures and evictions. The serious delinquency rate for Fannie hit 3.2% in late September, up from 2.56% three months earlier. Freddie Mac saw a similar jump, going from 2.48% to 3.04%.

MORTGAGE ORIGINATION EXPECTED TO HIT $4 TRILLION IN 2020

New home sales are up a whopping 32.1% year-over-year and 16.9% year to date according to the latest data from the Census Bureau. And those homes don't come cheap. The median sales price for a home sold in September of this year came in at $326,800 with the average sales price at an eye-popping $405,400.

It's no surprise that prices are rising fast in this low interest rate environment where high demand is met with limited supply. The latest S&P CoreLogic Case-Shiller home price index, measuring 19 cities in the United States, shows a 5.7% increase in August year-over-year. Many economists feel that this upward pressure in pricing will continue for some time as inventory remains low. However, the Census Bureau did report single-family housing starts rising to an annual rate of 1.108 million in September, a positive sign for future inventory data.

Pending home sales took a hit in September, falling by 2.2% in the latest data release from the National Association of Realtors. That was the first decline in four months. Annually, pending sales were up 20.5% in September.

Higher prices may be keeping more buyers at bay as mortgage application volume for purchases was flat this week. The Mortgage Bankers Association's weekly data shows refinances are leading the way with origination volume 80% higher than this same week in 2019. On an unadjusted basis, purchase volume was up 24% annually but decreased 0.3% from a week ago.

Overall, mortgage originations are expected to hit $4 trillion in volume for the first time ever, according to Fannie Mae's October forecast. Fannie Mae's economists say there will be more refinances in 2020 than there were total loans produced in 2019. Separately, purchases and refinances aren't expected to hit records, however. The forecast calls for $2.6 trillion in refinances and $1.5 trillion in purchases in 2020. The best year for refinances was 2003 with $2.7 trillion, while purchases hit their peak in 2005 at $1.51 trillion.

Refinances remain popular because of interest rates that remain at historically low levels. This week's Freddie Mac average on a 30-year fixed-rate mortgage came in at 2.81%.

Forbearance continues to be an issue for many Americans as the pandemic-related job losses take their toll. While loans backed by Fannie Mae and Freddie Mac saw another week of declines in forbearance rate, Ginnie Mae loans saw an increase. Ginnie Mae loans include those backed by the Federal Housing Administration (FHA). Keep in mind, the Federal Housing Finance Authority agreed to keep buying qualified loans in forbearance through Nov. 30, in order to support homeowners and mortgage lenders. The FHA extended its moratorium on foreclosures and evictions through Dec. 31.

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