US homebuilder stocks surge on hopes for demand boost after Fed rate cuts

(Reuters) - Shares of major U.S. homebuilders surged in premarket trade on Thursday, buoyed by expectations of higher demand due to reduced borrowing costs after the Federal Reserve unveiled an oversized interest rate cut.

D.R. Horton Lennar, PulteGroup and Toll Brothers rose roughly 3% before the bell. Lennar is set to report its quarterly earnings later today.

The U.S. central bank on Wednesday kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction that is expected to further reduce mortgage rates in the coming months and help reduce incentives that builders need to offer to attract buyers.

Shares of home improvement chains Home Depot and Lowe's were also up about 2% in premarket trading on Thursday.

The lower cost of financing could also boost further homebuilding activity offsetting a chronic shortage of homes that has been a growing issue since the 2008 financial crisis.

The central bank drove up interest rates between 2022 and 2023 to the 5.25%-5.50% range to bring down high inflation, causing a slowdown in the housing market, but mortgage rates have been falling as the Fed telegraphed rate reductions.

The average 30-year fixed rate mortgage rate recently declined to 6.20% according to Freddie Mac, from a high of nearly 8% months ago.

Fed rate cuts will likely push mortgage interest rates down and should reduce interest rates on loans for land development and home construction businesses, NAHB Chief Economist Robert Dietz said in a recent report.

"Lowering the cost of construction is critical to confront persistent challenges for housing affordability."

Homebuilder stocks have rallied recently with the S&P 500 Homebuilding Index gaining more than 30% so far this year compared to a 17% rise in the S&P 500 Index , pricing in expectations of further rate cuts and the corresponding easing in mortgage rates.

(Reporting by Pratyush Thakur in Bengaluru; Editing by Tasim Zahid)