Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements

5. Fair Value Measurements

Accounting Standards Codification (“ASC”) ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”), as updated and amended by ASU 2011-04, defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

The following table sets forth the fair values and methods used for measuring the fair values of financial instruments on a recurring basis:

			Fair Value
Financial Instrument	Hierarchy		June 30, 2012		December 31, 2011
			(Dollars in thousands)
Marketable Securities (available-for-sale)
Equity securities		Level 1	$	178,846	$	160,021
Debt securities		Level 2		308,185		359,922
Total available-for-sale securities			$	487,031	$	519,943
Mortgage Loans Held-For-Sale, net		Level 2	$	65,687	$	78,335

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents. For cash and cash equivalents, the fair value approximates carrying value.

Marketable Securities. The Company’s marketable securities consist of fixed rate and floating rate interest earning securities, primarily: (1) debt securities, which may include, among others, United States government and government agency debt and corporate debt; (2) holdings in mutual fund equity securities and (3) deposit securities, which may include, among others, certificates of deposit and time deposits. As of June 30, 2012 and December 31, 2011, all of the Company’s marketable securities were treated as available-for-sale investments and, as such, the Company has recorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income.

The following tables set forth the amortized cost and estimated fair value of the Company’s available-for-sale marketable securities.

	June 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding:
Equity security	$	183,736	$	178,846	$	169,565	$	160,021
Debt securities		272,797		275,929		323,454		325,413
Total available-for-sale securities	$	456,533	$	454,775	$	493,019	$	485,434
Financial Services:
Total available-for-sale debt securities	$	31,888	$	32,256	$	34,164	$	34,509

As of June 30, 2012 and December 31, 2011, the Company’s marketable securities (homebuilding and financial services in aggregate) were in an unrealized loss position of $1.4 million and $7.2 million, respectively. The equity securities, which consist of four mutual funds which primarily invest in bonds, have a combined unrealized loss of $4.9 million as of June 30, 2012. Management currently does not have the intent to sell any of its securities that are currently in an unrealized loss position, and it is currently not likely that the Company will be required to sell these marketable securities before the recovery of their cost basis. Additionally, due to the short period of time that the Company’s marketable securities have been in an unrealized loss position, and that the decline in market value occurred during a period of overall decline in market values, the decline is believed to be temporary.

Mortgage Loans Held-for-Sale, Net. As of June 30, 2012, the primary components of the Company’s mortgage loans held-for-sale that are measured at fair value on a recurring basis are: (1) mortgage loans held-for-sale under commitments to sell; and (2) mortgage loans held-for-sale not under commitments to sell. At June 30, 2012 and December 31, 2011, the Company had $61.0 million and $77.5 million, respectively, of mortgage loans held-for-sale under commitments to sell for which fair value was based upon Level 2 inputs, which were the quoted market prices for those mortgage loans. At June 30, 2012 and December 31, 2011, the Company had $4.7 million and $0.8 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell, and as such, the fair value was based upon Level 2 fair value inputs, primarily the estimated market price received from an outside party.

Inventories. The Company’s inventories consist of housing completed or under construction and land and land under development. The Company’s inventories are primarily associated with subdivisions where the Company intends to construct and sell homes on the land, including model and unsold started homes. Components of housing completed or under construction primarily include: (1) land costs transferred from land and land under development; (2) hard costs associated with the construction of a house; (3) overhead costs, which include real property taxes, engineering fees and permits and fees; (4) capitalized interest; and (5) indirect construction costs. Land costs are transferred from land and land under development to housing completed or under construction at the point in time that the Company begins construction of a home on an owned lot. Costs capitalized to land and land under development primarily include: (1) land costs; (2) development costs for the land; (3) entitlement costs; (4) capitalized interest; and (5) title insurance, taxes and closing costs directly related to the purchase of the land parcel.

Homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. The Company determines impairments on a subdivision level basis as each such subdivision represents the lowest level of identifiable cash flows. In making this determination, the Company reviews, among other things, the following for each subdivision:

• actual and trending “Operating Profit” (which is defined as home sales revenue less home cost of sales and all direct incremental costs associated with the home closing) for homes closed;

• estimated future undiscounted cash flows and Operating Profit;

• forecasted Operating Profit for homes in Backlog (as defined);

• actual and trending net and gross home orders;

• base sales price and home sales incentive information for homes closed and homes in Backlog;

• market information for each sub-market; and

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

If events or circumstances indicate that the carrying value of the Company’s inventory may not be recoverable, assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision 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. The Company generally determines the estimated fair value of each subdivision by determining the present value of the estimated future cash flows at discount rates that are commensurate with the risk of the subdivision under evaluation. For both the three months and six months ended June 30, 2011, the Company recognized inventory impairment charges of $8.6 million. The discount rates used in the Company’s estimated discounted cash flows ranged from 12% to 18% during the three months and six months ended June 30, 2011. The Company did not record any inventory impairments during the three and six months ended June 30, 2012.

Related Party Assets. Related party assets are included in prepaid expenses and other assets in the Company’s Consolidated Balance Sheets. The Company’s related party assets are debt security bonds that it acquired from a quasi-municipal corporation in the state of Colorado. The Company has estimated the fair value of the related party assets based upon discounted cash flows as the Company does not believe there is a readily available market for such assets. The estimated cash flows from the bonds are ultimately based upon the Company’s estimated cash flows associated with the building, selling and closing of homes in one of its Colorado subdivisions. The estimated fair values of these assets are based upon Level 3 cash flow inputs. Based upon this evaluation, the estimated fair value of the related party assets approximates its carrying value.

Mortgage Repurchase Facility. The Company’s Mortgage Repurchase Facility is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities. The fair value approximates carrying value.

Senior Notes: The estimated values of the senior notes in the following table are based on Level 2 inputs, including market prices of bonds in the homebuilding sector.

	June 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
5.375% Senior Notes due 2014	$	249,528	$	263,275	$	249,438	$	254,667
5.375% Senior Notes due 2015		249,876		266,058		249,857		252,083
5.625% Senior Notes due 2020		245,066		250,600		244,813		227,467
Total	$	744,470	$	779,933	$	744,108	$	734,217