After a long period of tepidness, the U.S. Housing market is rebounding. Limited existing inventory, stabilizing mortgage rates and improving industry trends are boosting buyers’ sentiments. Builders are also confident about future growth in the industry as inflation continuous to ease and rent growth are expected to slow down.

Per the recent NAHB/Wells Fargo Housing Market Index, Builder confidence for newly built single-family homes in May rose five points to 50 from April. This is the first time that sentiment levels have reached to the midpoint of 50 since July 2022. Also, housing starts in April increased 2.2%, the highest rate thus far in 2023, reported by the U.S. Census Bureau.

Although the industry is still dealing with high construction costs, persistent labor shortages and tightening credit conditions for construction loans, these metrics are gaining traction. This is backed by smallest monthly gain in the housing inflation since January 2022, thereby cooling off inflation below 5% for the first time in the past two years.

In addition to these positives, Construction industry employment (residential and non-residential) exceeds its February 2020 levels. The latest housing data encourages the Zacks Building Products - Home Builders industry bellwethers like M.D.C. Holdings, Inc. , Tri Pointe Homes, Inc. (TPH Quick QuoteTPH - Free Report) , D.R. Horton, Inc. (DHI Quick QuoteDHI - Free Report) and NVR Inc. (NVR Quick QuoteNVR - Free Report) , each sporting a Zacks Rank #1 ( Strong Buy).

Based on various parameters, let’s check whether MDC or Tri Pointe is a more profitable stock. It is to be noted that both companies are almost neck to neck in terms of market cap. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Determinants of the Stocks

MDC — with a market cap of more than $3.08 billion — engages in building and selling single-family detached homes for first-time and move-up buyers under the name “Richmond American Homes.”

The company’s Build-to-Order process, also known as ‘dirt sales’, provides buyers with a wide range of choices in major aspects of their future home and personalized customer experience through in-house community teams. MDC’s Financial Services operations offer mortgage loans, insurance coverage and title agency services to its subsidiaries and customers in the United States.

Tri Pointe — with a market cap of almost $2.96 billion — designs, constructs and sells innovative single-family detached and attached homes designed primarily for entry-level, move-up, luxury and active adult homebuyers. The company builds premium homes and communities in 10 states.

The company has been benefiting from solid homebuilding industry fundamentals, land acquisition strategy and cost-control measures. Also, strong demographics and limited availability of homes are likely to support the company in the future. The company anticipates that potential homeowners will continue to seek homeownership despite rising home prices and increasing rental costs.

Strong Brand Presence & Customer Spectrum

Although MDC is a slightly bigger company in terms of market cap, Tri Pointe has a broad spectrum of customers as it serves luxury and active adults and entry-level and move-up buyers. Also, Tri Pointe’s homebuilding segments build attached and detached single-family homes, town homes and condominiums. Both companies’ investments in land acquisition and development are encouraging.

Zacks Estimates & Stock Performance

Owing to intense inflationary pressure and persistent supply issues, the housing industry is likely to witness low revenues and earnings.

The Zacks Consensus Estimate for MDC’s 2023 earnings indicates a 57.9% year-over-year fall. Tri Pointe’s bottom line for 2023 is likely to decline 44.6%. The companies’ earnings estimates have moved up in the past 30 days. Although Tri Pointe’s earnings expectation looks comparatively less gloomy, MDC has better Growth Score of A.

Image Source: Zacks Investment Research

Shares of MDC and Tri Pointe have gained 37.5% and 64.6%, respectively, this year compared with the industry’s 33.9% rally, the Zacks Construction sector’s 16% rise and S&P 500 index’s 10.5% growth. Although the stocks have performed impressively, TPH fared better than MDC and the industry as a whole.

A Look at Stocks’ Profitability & Valuation

Return on Equity in the trailing 12 months for MDC is 16.3% compared with Tri Pointe and the industry’s 20.8% and 21.3%, respectively. Tri Pointe provides more impressive returns to investors than MDC.

The trailing 12-month price-to-earnings multiple for MDC and Tri Pointe is 6.46 and 5.57, respectively, compared with 6.76 for the industry. Tri Pointe’s shares are cheaper than MDC and the industry.

Our Take

Tri Pointe certainly has the edge over MDC as it has better customer spectrum, price performance, prospects and provides impressive returns to investors and is quite cheaper. The companies remain optimistic about overall homebuilding trends, given promising fundamentals and improving industry parameters.

A Brief Overview of the Other Two Stocks

D.R. Horton: This Texas-based prime homebuilder continues to gain from production capabilities, industry-leading market share, solid acquisition strategy, broad geographic footprint and diverse product offerings across multiple brands and price points.

D.R. Horton’s earnings estimates for 2023 have moved up to $11.01 per share from $9.08 in the past 30 days.

NVR: This well-known homebuilder is benefiting from its lot acquisition strategy, which helps it to avoid financial requirements and risks associated with direct land ownership and land development. This helps it to operate in the cyclical industry and gain efficiencies and a competitive edge over its peers.

Lennar’s earnings estimates for 2023 have moved up to $423.83 per share from $394.69 in the past 30 days.