Zillow Market Pulse: November 4, 2020

November 4, 2020

Early election results sent bond yields down — and mortgage rates are likely to follow. Mortgage applications overall remained strong last week, though purchase loans in particular continued to slide somewhat. And improvement in the U.S. service sector slowed in October.

Bond yields fell sharply on preliminary election results

• The yield on the 10-year Treasury fell by about 0.1 percentage points on Wednesday, the most in any day since April.
• Following early election returns, bond market investors seemingly view a large fiscal relief package as less likely.

Enduring refi demand buoys mortgage application activity

• The Mortgage Bankers Association's Weekly Mortgage Applications Survey showed combined, seasonally adjusted mortgage application activity improved 3.8% in the week ending October 30 from the week prior.
• Refinance activity rose 6.4%, while home purchase loan applications slipped by 1.3%.

Improvements in service-based industries slowed in October

• The ISM Services Index fell 1.2 points from September to October, to 56.6.
• Any reading greater than 50 suggests the sector is expanding versus contracting.

So what? 

Thus far, stock markets have responded favorably to the preliminary results of last night's federal election, which is still unfolding. Many companies see the presumed outcome of a government in which each party controls at least one branch of government — limiting the possibility of sweeping changes to tax policies, health care and business regulation — as more-favorable for their outlooks. But the uncertain outcome also appears to have led to a spike in demand for government bonds, usually something that softens when the stock market improves. Bonds are viewed as a safe haven for investors, a relatively sure bet compared to more volatile stock markets. A day after rising to their highest levels since June, bond yields plummeted today, falling by more in one day than they have in any other day since April. In this case, bond market investors appear to be interpreting the uncertain election results as a sign that more economic stimulus is unlikely in the near term. Bond yields are a key determinant of mortgage rates, so today's developments suggest that mortgage rates will head back downward in the coming days.

Mortgage rates have already been very low for several months now, helping stoke demand for home purchases and refinances — and that demand remains hot. According to the Mortgage Bankers Association's Weekly Mortgage Applications Survey, applications for home refinance loans increased 6.4% in the week ending October 30 from the week before, and was 87.8% above the same week last year. Home refinance activity has steadily improved in the last few weeks, despite the fact that mortgage rates have barely budged, suggesting that there are many homeowners for whom refinancing still makes financial sense. Applications for home purchase loans also remain well above typical levels from the past decade, but activity has waned in recent weeks. Home purchase loan applications have declined by 7.9% since a recent high in mid-September.

While improvements and expansion in U.S. service-based industries in the U.S. – which make up about 70% of the nation's GDP – continued in October, growth slowed last month. The ISM Services Index slipped 1.2 points to 56.6 in October (any reading above 50 suggests that the sector is expanding overall). The report's major subindices, which highlight business activity, employment and new orders being placed, all also took a step back in October after improving in September. The index measuring service sector employment slipped 1.7 points on the month to 50.1, just barely in expansion territory. This deceleration aligns with expectations for the October jobs report, due this Friday, which many expect to show slowing job growth from previous months. The ISM services report was starkly different from their earlier read on the manufacturing sector, which showed factory activity rose to the highest level in almost 17 years in October. This improvement is likely attributable to recent increases in the relative demand for household goods as many service-based industries remain limited by pandemic-driven measures.

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