Bank of America Merrill Lynch now recommends "overweighting non-agency mortgage-backed securities (MBS), commercial mortgage-backed securities (CMBS) and triple-B credit card ABS." In a research note Monday, analysts at the banking giant said they "remain constructive on longer term growth potential for home prices but concede that weak MBA Purchase Index readings signal near-term risks to the downside." The analysts said the firm maintains a "market weight recommendation" for agency MBS. Despite historically low mortgage rates and cheap housing valuations, people still aren't buying houses. Although, BofAML analysts estimate home prices are 4% above fair value and low mortgage rates "make buying a home very attractive relative to renting in almost all local markets." However, research finds that rental rates are continuing to rise. Chris Flanagan, MBS/ABS strategist for Banc of America Securities, said "tight spreads and low yields suggest it may be time to lighten up exposure, but the weak application activity supports the low net supply/tight spread story and the risk of a near term overshoot to the downside on home prices says owning higher-yielding, high-quality bonds still makes sense." As HousingWire reported earlier this month, banks strategy of buying Treasuries and short-term cash products while avoiding mortgage-backed securities until spreads widen isn't paying off, according to Barclays Capital. Therefore, banks will get back to buying MBS once yields are better than Treasuries. BofAML now recommends overweighting the non-agency MBS sector due to its longer term constructive view on home price, "where we think equity like returns are still available." The firm maintains a market weighting of ABS, but recommends overweighting triple-B credit cards to take advantage of improving trends. BofAML also maintains its market-weight recommendation of Agency MBS because low yields and low spreads suggest reducing exposure might make sense "We note that, due to extraordinarily positive technical conditions, recent price volatility has been far lower than equities, and we think that is likely to continue even in the face of some near term weakness in home prices," BofAML analysts said. "A constructive view on home prices translates into a constructive view on commercial real estate, as the two sectors are closely tied to one another. We therefore also recommend an overweight of CMBS." Recent CMBS bonds, such as AMs and AJs are showing returns in the eight to 14% range, the reports adds. Write to: Jason Philyaw