Inventories

9 Months Ended

Sep. 30, 2022

The following table sets forth, by reportable segment, information relating to our homebuilding inventories:


	September 30, 2022		December 31, 2021

	(Dollars in thousands)
Housing completed or under construction:
West	$	1,284,960	$	1,077,256
Mountain	675,660		596,164
East	273,288		244,196
Subtotal	2,233,908		1,917,616
Land and land under development:
West	1,177,322		1,235,363
Mountain	444,017		435,958
East	187,187		171,914
Subtotal	1,808,526		1,843,235
Total inventories	$	4,042,434	$	3,760,851

Our inventories are primarily associated with communities where we intend to construct and sell homes, including models and unsold homes. Costs capitalized to land and land under development primarily include: (1) land costs; (2) land development costs; (3) entitlement costs; (4) capitalized interest; (5) engineering fees; and (6) title insurance, real property taxes and closing costs directly related to the purchase of the land parcel. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) direct construction costs associated with a house; (3) real property taxes, engineering fees, permits and other fees; (4) capitalized interest; and (5) indirect construction costs, which include field construction management salaries and benefits, utilities and other construction related costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that construction of a home on an owned lot begins.

In accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”), homebuilding inventories, excluding those classified as held for sale, are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. We evaluate inventories for impairment at each quarter end on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, we review, among other things, the following for each subdivision:

•actual and trending “Operating Margin” (which is defined as home sale revenues less home cost of sales and all incremental costs associated directly with the subdivision, including sales commissions and marketing costs);

•forecasted Operating Margin for homes in backlog;

•actual and trending net home orders;

•homes available for sale;

•market information for each sub-market, including competition levels, home foreclosure levels, the size and style of homes currently being offered for sale and lot size; and

•known or probable events indicating that the carrying value may not be recoverable.

If events or circumstances indicate that the carrying value of our inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision (including capitalized interest) to its carrying value. If the undiscounted future cash flows are less than the subdivision’s carrying value, the carrying value of the subdivision is written down to its then estimated fair value. We generally determine the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates, which are Level 3 inputs, that are commensurate with the risk of the subdivision under evaluation. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by our estimates of future home sale revenues, home construction costs, and development costs per home, all of which are Level 3 inputs.

If land is classified as held for sale, we measure it in accordance with ASC 360 at the lower of the carrying value or fair value less estimated costs to sell. In determining fair value, we primarily rely upon the most recent negotiated price, which is a Level 2 input. If a negotiated price is not available, we will consider several factors including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies, which are considered Level 3 inputs. If the fair value less estimated costs to sell is lower than the current carrying value, the land is impaired down to its estimated fair value less costs to sell.

Inventory impairments recognized by segment for the three and nine months ended September 30, 2022 and 2021 are shown in the table below.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Dollars in thousands)				(Dollars in thousands)
West	$	25,900	$	—	$	26,560	$	—
Mountain	—		—		—		—
East	2,515		—		2,515		—
Total Inventory Impairments	$	28,415	$	—	$	29,075	$	—

The table below provides quantitative data, for the periods presented, where applicable, used in determining the fair value of the impaired inventory.


	Impairment Data					Quantitative Data
Three Months Ended	Number of Subdivisions Impaired	Inventory Impairments		Fair Value of Inventory After Impairments		Discount Rate
	(Dollars in thousands)
March 31, 2022	1	$	660	$	1,728			N/A
September 30, 2022	9	$	28,415	$	44,615	15	%	—	18%
Total		$	29,075