Fair Value Measurements

9 Months Ended

Sep. 30, 2012

Fair Value Measurements

5. Fair Value Measurements

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		September 30, 2012		December 31, 2011
			(Dollars in thousands)
Marketable Securities (available-for-sale)
Equity securities		Level 1	$	204,377	$	160,021
Debt securities		Level 2		332,343		359,922
Total available-for-sale securities			$	536,720	$	519,943
Mortgage Loans Held-For-Sale, net		Level 2	$	86,648	$	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. Our 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 which consist primarily of debt securities; and (3) deposit securities, which may include, among others, certificates of deposit and time deposits. As of September 30, 2012 and December 31, 2011, all of our marketable securities were treated as available-for-sale investments and, as such, we have recorded all of its marketable securities at fair value with changes in fair value being recorded as a component of accumulated other comprehensive income (loss).

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

	September 30, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding:
Equity security	$	205,764	$	204,377	$	169,565	$	160,021
Debt securities		294,890		299,428		323,454		325,413
Total homebuilding available-for-sale securities	$	500,654	$	503,805	$	493,019	$	485,434
Financial Services:
Total financial services available-for-sale debt securities	$	32,361	$	32,915	$	34,164	$	34,509
Total available-for-sale marketable securities	$	533,015	$	536,720	$	527,183	$	519,943

As of September 30, 2012 and December 31, 2011, our marketable securities (homebuilding and financial services in aggregate) were in an unrealized gain position of $3.7 million and an unrealized loss position of $7.2 million, respectively. The equity securities, which consist of four mutual funds which primarily invest in corporate bonds and other fixed income securities, had a combined unrealized loss of $1.4 million as of September 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 we will need to sell these marketable securities before the recovery of their cost basis. The unrealized loss related to these mutual funds at December 31, 2011 was $9.5 million. Given the significant improvement in the unrealized loss since December, 31, 2011 and the fact that the decline in market value occurred during a period of overall decline in market values, the unrealized loss is believed to be temporary.

Mortgage Loans Held-for-Sale, Net. As of September 30, 2012, the primary components of our 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 September 30, 2012 and December 31, 2011, we had $80.0 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 September 30, 2012 and December 31, 2011, we had $6.6 million and $0.8 million, respectively, of mortgage loans held-for-sale that were not under commitments to sell. The fair value for those loans was primarily based upon the estimated market price received from an outside party which is a Level 2 fair value input.

Inventories. Our inventories consist of housing completed or under construction and land and land under development. Inventories are primarily associated with subdivisions where we intend 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) 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. 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.

Homebuilding inventories are carried at cost unless events and circumstances indicate that the carrying value of the underlying subdivision may not be recoverable. We determine impairments 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 direct incremental costs associated with the home closing) for homes closed;

• estimated future undiscounted cash flows and Operating Margin;

• forecasted Operating Margin for homes in “Backlog” (which is defined as homes under contract but not yet delivered);

• 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 our 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. We generally determine 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 nine months ended September 30, 2011, we recognized inventory impairment charges of $4.0 million and $12.7 million, respectively. The discount rates used to estimate discounted cash flows ranged from 12% to 20% during the three months and nine months ended September 30, 2011. We did not record any inventory impairments during the three and nine months ended September 30, 2012.

Related Party Assets. Related party assets are included in prepaid expenses and other assets in our accompanying consolidated balance sheets. Our related party assets are debt security bonds (“Metro District Bond Securities”) that we acquired from a quasi-municipal corporation in the state of Colorado. We estimated the fair value of the related party assets based upon discounted cash flows as we do not believe there is a readily available market for such assets. The estimated cash flows from the bonds are ultimately based upon our estimated cash flows associated with building, selling and closing homes in one of our Colorado communities. 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 which was $6.7 million as of September 30, 2012 and December 31, 2011.

Mortgage Repurchase Facility. Our Mortgage Repurchase Facility is at floating rates or at fixed rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. 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 other homebuilder bonds.

	September 30, 2012				December 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
5.375% Senior Notes due 2014	$	249,574	$	263,967	$	249,438	$	254,667
5.375% Senior Notes due 2015		249,885		266,467		249,857		252,083
5.625% Senior Notes due 2020		245,195		271,050		244,813		227,467
Total	$	744,654	$	801,484	$	744,108	$	734,217