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BofA: Fed seems OK with declining home sales

Don't expect any increase in economic help

Federal Reserve Building
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Bank of America Merrill Lynch (BAC) analysts released a note to clients highlighting the response of home sales to continued tapering from the Federal Reserve.

As Federal Reserve chair Janet Yellen indicated last week, the government is keen to continue its support of the economy via purchases of Treasurys and mortgage-backed securities. However, the amount of which it invests in is being gradually decreased.

The BofA analysts said, that by "affirming the QE taper and seemingly doubling down on tightening by adding the “six months” comment, the Fed seems to be saying that it is OK with the 15% decline in pending home sales and may well even be comfortable with further declines."

"This comes as a surprise to us and forces us to reconsider our investment views for securitized products," write analysts Justin Borst and Chris Flanagan in their Securitization Weekly report.

New home sales of single-family houses in February dropped 3.3% to 440,000, reaching a 5-month low, according to the latest report from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.

The surprise mention in the note is understandable. The Fed often cites improving economic benchmarks, such as the nation adding more jobs, as necessary to justify the reduction of monetary support. The BofA analysts are suggesting that declining home sales is actually one negative economic event the Fed is willing to live with and is likely to continue on its path of pulling support for the secondary markets.

The BofA analysts argue that the rate rise in fact precipitated the pending home sales decline, and tapering is having an adverse economic impact.

"Moreover, at this point, given the continued weakness in mortgage purchase activity, there is no evidence that a robust turn or recovery in sales will be seen in the months ahead," they write.

"We are not saying it won’t happen or can’t happen," they add. "We are just saying there is no evidence yet that it will happen."

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