. Fair Value Measurements

ASC Topic 820,

Fair Value Measurements

(“ASC 820”), 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
		September 30,		December 31,
Financial Instrument	Hierarchy	2016		2015
		(Dollars in thousands)
Marketable equity securities (available-for-sale)	Level 1	$	79,221	$	103,694
Mortgage loans held-for-sale, net	Level 2	$	117,989	$	115,670
Metropolitan district bond securities (related party) (available-for-sale)	Level 3	$	29,132	$	25,911

The following methods and assumptions were used to estimate the fair value of each class of financial instruments as of September 30, 2016 and December 31, 2015.

Cash and cash equivalents, restricted cash, trade and other receivables, prepaid and other assets, accounts payable, accrued liab

ilities and borrowings on our revolving credit facility

Fair value approximates carrying value.

Marketable s

ecurities

. As of September 30, 2016 and December 31, 2015, we only held marketable equity securities. However, during 2015, we also held marketable debt securities. Our equity securities consist of holdings in corporate equities, preferred stock, exchange traded funds and holdings in mutual fund securities (which are primarily invested in debt securities). Our debt securities consisted primarily of fixed and floating rate interest earning debt securities, which included, among others, United States government and government agency debt and corporate debt. As of September 30, 2016 and December 31, 2015, all of our equity securities were treated as available-for-sale investments and as such, are recorded at fair value with all changes in fair value initially recorded through AOCI, subject to an assessment to determine if an unrealized loss, if applicable, is other-than-temporary.

Each quarter we assess all of our securities in an unrealized loss position for a potential other-than-temporary impairment (“OTTI”)

. If the unrealized loss is determined to be other-than-temporary, an OTTI is recorded to the

other-than-temporary impairment of marketable securities line in the homebuilding section of our

consolidated statements of operations and comprehensive income.

During the three months and nine months ended September 30, 2016, we recorded pretax OTTIs of $0.3 million and $1.0 million, respectively, for certain of our equity securities that were in an unrealized loss position as of the end of each respective period, compared to $2.2 million for both the three and nine months ended September 30, 2015.

The following tables set forth the cost and fair value of our marketable equity securities:

	September 30, 2016
	Amortized Cost		OTTI			Net Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding equity securities	$	48,225	$	(958	)	$	47,267	$	57,116
Financial services equity securities		21,905		(112	)		21,793		22,105
Total marketable equity securities	$	70,130	$	(1,070	)	$	69,060	$	79,221

	December 31, 2015
	Amortized Cost		OTTI			Net Amortized Cost		Fair Value
	(Dollars in thousands)
Homebuilding equity securities	$	89,738	$	(3,969	)	$	85,769	$	92,387
Financial services equity securities		12,026		-			12,026		11,307
Total marketable equity securities	$	101,764	$	(3,969	)	$	97,795	$	103,694

As of September 30, 2016 and December 31, 2015, our marketable equity securities were in net unrealized gain positions totaling $10.2 million and $5.9 million, respectively. Our individual marketable equity securities that were in unrealized loss positions, excluding those that were impaired as part of any OTTI, aggregated to an unrealized loss of $0.5 million and $0.9 million as of September 30, 2016 and December 31, 2015, respectively.

The table below sets forth the aggregated unrealized losses for individual equity securities that were in unrealized loss positions but did not have OTTIs recognized.

We do not believe the decline in the value of these marketable securities as of September 30, 2016 is other-than-temporary.

	September 30, 2016							December 31, 2015
	Number of Securities in an Unrealized Loss Position		Aggregate Unrealized Loss Position			Aggregate Fair Value of Securities in an Unrealized Loss Position		Number of Securities in an Unrealized Loss Position		Aggregate Unrealized Loss Position			Aggregate Fair Value of Securities in an Unrealized Loss Position
	(Dollars in thousands)
Marketable equity securities		2	$	(450	)	$	2,548		4	$	(882	)	$	6,116

The table below sets forth gross realized gains and losses from the sale of available-for-sale marketable securities. We record the net amount of these gains and losses to either other expense or interest and other income, dependent upon whether there is a net realized loss or gain, respectively, in the homebuilding section or financial services section of our consolidated statements of operations and comprehensive income.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
	(Dollars in thousands)
Gross realized gains on sales of available-for-sale securities
Equity securities	$	740		$	980		$	2,210		$	1,855
Debt securities		-			42			-			413
Total	$	740		$	1,022		$	2,210		$	2,268

Gross realized losses on sales of available-for-sale securities
Equity securities	$	(91	)	$	(1,604	)	$	(1,299	)	$	(2,161	)
Debt securities		-			(6	)		-			(233	)
Total	$	(91	)	$	(1,610	)	$	(1,299	)	$	(2,394	)

Net realized gain (loss) on sales of available-for-sale securities	$	649		$	(588	)	$	911		$	(126	)

Mortgage

oans

eld-for-

ale,

et.

Our mortgage loans held-for-sale, which are measured at fair value on a recurring basis, include (1) mortgage loans held-for-sale that are under commitments to sell and (2) mortgage loans held-for-sale that are not under commitments to sell. At September 30, 2016 and December 31, 2015, we had $90.5 million and $92.6 million, respectively, of mortgage loans held-for-sale under commitments to sell. The fair value for those loans was based on quoted market prices for those mortgage loans, which are Level 2 fair value inputs. At September 30, 2016 and December 31, 2015, we had $27.4 million and $23.1 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.

Gains on sales of mortgage loans, net, are included as a component of revenues in the financial services section of our consolidated statements of operations and comprehensive income. For the three and nine months ended September 30, 2016, we recorded net gains on the sales of mortgage loans of $10.0 million and $22.5 million, respectively, compared to $3.4 million and $12.2 million for the same periods in the prior year, respectively.

Metropolitan district bond securities (related party).

The metropolitan district bond securities (the “Metro Bonds”) are included in the homebuilding section of our consolidated balance sheets. We acquired the Metro Bonds from a quasi-municipal corporation in the state of Colorado (the “Metro District”), which was formed to help fund and maintain the infrastructure associated with a master-planned community being developed by our Company. Cash flows received by the Company from these securities reflect principal and interest payments from the Metro District, which are generally received in the fourth quarter, and are supported by an annual levy on the taxable assessed value of real estate and personal property within the Metro District’s boundaries. The stated year of maturity for the Metro Bonds is 2037. However, if the unpaid principal and all accrued interest are not paid off by the year 2037, the Company will continue to receive principal and interest payments in perpetuity until the unpaid principal and accrued interest is paid in full.

In accordance with ASC Topic 310-30,

Loans and Debt Securities Acquired with Deteriorated Credit Quality

(“ASC 310-30”), we adjust the bond principal balance using an interest accretion model that utilizes future cash flows expected to be collected. Furthermore, as this investment is accounted for as an available-for-sale asset, we update its fair value on a quarterly basis, with the adjustment being recorded through AOCI. The fair value is based upon a discounted future cash flow model, which uses Level 3 inputs. The primary unobservable inputs used in our discounted cash flow model are (1) the forecasted number of homes to be closed, as they drive increases to the tax paying base for the Metro District, (2) the forecasted assessed value of those closed homes and (3) the discount rate. Cash receipts, which are scheduled to be received in the fourth quarter, reduce the carrying value of the Metro Bonds. The increases in the value of the Metro Bonds during the past two years are based on a larger percentage of future cash flows coming from homes that have closed, which utilize a lower discount rate as those cash flows have a reduced amount of risk. The table below provides quantitative data, as of September 30, 2016, regarding each unobservable input and the sensitivity of fair value to potential changes in those unobservable inputs.

	Quantitative Data				Sensitivity Analysis
Unobservable Input	Range			Weighted Average	Movement in Fair Value from Increase in Input	Movement in Fair Value from Decrease in Input
Number of homes closed per year	0	to	127	102	Increase	Decrease
Average sales price	$400,000	to	$1.3 million	$527,000	Increase	Decrease
Discount rate	5%	to	12%	9.0%	Decrease	Increase

The table set forth below summarizes the activity for our Metro Bonds:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
	(Dollars in thousands)
Balance at beginning of period	$	28,604	$	22,259	$	25,911	$	18,203
Increase in fair value (recorded in other comprehensive income)		117		1,472		1,982		4,815
Change due to accretion of principal		411		343		1,239		1,056
Cash receipts		-		-		-		-
Balance at end of period	$	29,132	$	24,074	$	29,132	$	24,074

Mortgage Repurchase Facility.

The debt associated with our mortgage repurchase facility (see Note 18 for further discussion) is at floating rates that approximate current market rates and have relatively short-term maturities, generally within 30 days. The fair value approximates carrying value and is based on Level 2 inputs.

Senior Notes

. The estimated values of the senior notes in the following table are based on Level 2 inputs, which primarily reflect estimated prices for our senior notes and were obtained from multiple pricing sources.

	September 30, 2016				December 31, 2015
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
5⅝% Senior Notes due February 2020, net	$	246,689	$	268,688	$	246,032	$	257,813
5½% Senior Notes due January 2024		248,345		263,883		248,209		252,188
6% Senior Notes due January 2043		346,325		315,887		346,283		276,938
Total	$	841,359	$	848,458	$	840,524	$	786,939