M.D.C. Holdings, Inc. ( MDC Quick Quote MDC - Free Report) has been benefiting from the robust build-to-order process, relentless land acquisitions and efforts to provide affordable homes. Also, robust housing market fundamentals are working as a catalyst for the company’s growth. Shares of MDC have gained 22.7% compared with the Zacks Building Products - Home Builders industry’s 20.7% rise over the past year. However, the company is witnessing supply chain disruptions. Also, rising land, labor and material cost remains a cause of concern. Major Growth Drivers Accretive Land Acquisition MDC’s growth strategy is largely dependent on land acquisitions. The company follows a systematic strategy of acquiring lots. During second-quarter 2021, the company spent $438 million on land acquisitions. Till the second quarter 2021-end, the company supplied more than 34,000 lots, reflecting a sequential increase of 7% and 37% increase from the year-ago period. In addition, it approved more than 5,739 lots for future purchases, compared with 1,244 lots purchased during the second quarter of 2020. Also, the company had closed 3,686 lots during the second quarter, across 66 subdivisions, representing a 282% increase from the prior-year period. The continuous acquisition strategy has eventually helped the company build and deliver homes on immediate demand. Build-To-Order Approach The company’s build-to-order approach facilitates its buyer with a huge range of choices in major aspects of their future home and personalized customer experience through in-house community teams. This approach is also known as “dirt sales”. It highly prioritizes customers by giving them the opportunity to customize their options according to their preference and affordability. MDC also banks on its “spec homes” strategy, which enables it to improve efficiency and reduce the inventory risk. Under this process, the company limits the number of homes started without a contract and initiates construction only after a purchase agreement has been executed. During second-quarter 2021, the company witnessed sales growth that is majorly driven by the robust build-to-order operating model. Focus on Entry-Level Buyers This Zacks Rank #3 (Hold) company is focused on growing demand for entry-level homes, addressing the need for lower-priced homes, given affordability concerns in the U.S. housing market. MDC has been rapidly benefiting from the successful execution of strategic initiatives to boost profitability, with focus on entry-level homes. Of late, the company has been closely observing the price appreciation of new homes across the country and is continuously trying to address the issue by providing housing options to new home buyers at a reasonable price. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Improved Housing Market Fundamentals Declining mortgage rates have been driving the U.S. residential market in recent times, thereby aiding MDC. Overall, the U.S. housing market seems to be back on track, defying headwinds like rising costs, low inventory levels, tight lending conditions and broad-based economic as well as public health risks associated with the pandemic. Revival of housing demand has been a boon for MDC and other industry peers like KB Home ( KBH Quick Quote KBH - Free Report) , Lennar Corporation ( LEN Quick Quote LEN - Free Report) , NVR, Inc. ( NVR Quick Quote NVR - Free Report) . Image Source: Zacks Investment Research Concerns
During the second quarter of 2021, the company’s margin was pressured by increased building material and labor costs. Also, the company expects to witness rise in lumber price during the latter half of 2021. The labor market has also tightened, with limited availability of labor arresting rapid growth in housing production. If the supply picture does not improve, prices could go up, thereby affecting affordability.
Furthermore, the company witnessed a demand-supply imbalance owing to persistent supply chain issues. The shortage of buildable lots, skilled labor and available capital for smaller builders are limiting home production, thereby lowering the inventory of homes.