Fair Values of Financial and Nonfinancial Instruments

6 Months Ended

Jun. 30, 2011

Fair Values of Financial and Nonfinancial Instruments

Fair Values of Financial and Nonfinancial Instruments

Note 11.  Fair Values of Financial and Nonfinancial Instruments

Financial Instruments

The Company’s financial instruments are held for purposes other than trading. The fair values of these financial instruments are based on quoted market prices, where available, or are estimated using other valuation techniques. Estimated fair values are significantly affected by the assumptions used. As required by ASC No. 820 (“ASC 820”), “Fair Value Measurements and Disclosures,” fair value measurements of financial instruments are categorized as Level 1, Level 2 or Level 3, based on the types of inputs used in estimating fair values.

Level 1 fair values are those determined using quoted market prices in active markets for identical assets or liabilities with no valuation adjustments applied. Level 2 fair values are those determined using directly or indirectly observable inputs in the marketplace that are other than Level 1 inputs. Level 3 fair values are those determined using unobservable inputs, including the use of internal assumptions, estimates or models. Valuation of these items is, therefore, sensitive to the assumptions used. Fair values represent the Company’s best estimates as of June 30, 2011, based on existing conditions and available information at the issuance date of these financial statements. Subsequent changes in conditions or available information may change assumptions and estimates.

The following table sets forth the values and measurement methods used for financial instruments that are measured at fair value on a recurring basis:

					FAIR VALUE
(in thousands)	HIERARCHY	JUNE 30, 2011			DECEMBER 31, 2010
Marketable securities, available-for-sale
U.S. Treasury securities	Level 1	$	3,157		$	15,863
Obligations of U.S. and local government agencies	Levels 1 and 2	36,313			33,044
Corporate debt securities issued under
U.S. government/agency-backed programs	Level 2	6,560			170,990
Corporate debt securities	Level 2	163,571			105,102
Asset-backed securities	Level 2	23,477			7,632
Time deposits	Level 2	45,908			76,312
Short-term pooled investments	Levels 1 and 2	80,020			28,852
Mortgage loans held-for-sale	Level 2	14,951			9,534
Mortgage interest rate lock commitments (“IRLCs”)	Level 3	3,267			1,496
Forward-delivery contracts	Level 2	(326		)	719
Options on futures contracts	Level 1	-			81

Marketable Securities, Available-for-sale

At June 30, 2011 and December 31, 2010, the Company had $359.0 million and $437.8 million, respectively, of marketable securities that were available-for-sale and comprised of U.S. Treasury securities; obligations of U.S. government and local government agencies; corporate debt backed by U.S. government/agency programs; corporate debt securities; asset-backed securities of U.S. government agencies and covered bonds; time deposits; and short-term pooled investments. (See Note 6, “Marketable Securities, Available-for-sale.”)

Other Financial Instruments

Options on futures contracts are exchange traded and based on quoted market prices (Level 1). Mortgage loans held-for-sale and forward-delivery contracts are based on quoted market prices of similar instruments (Level 2). At June 30, 2011, contractual principal amounts of loans held-for-sale totaled $14.7 million, compared to $9.6 million at December 31, 2010. Mortgage interest rate lock commitments (“IRLCs”) are valued at their aggregate market price premium or deficit, plus a servicing premium, multiplied by the projected close ratio (Level 3). The market price premium or deficit is based on quoted market prices of similar instruments; the servicing premium is based on contractual investor guidelines for each product; and the projected close ratio is determined utilizing an external modeling system, widely used within the industry, to estimate customer behavior at an individual loan level. Mortgage loans held-for-sale, options on futures contracts and IRLCs were included in “Other” assets within the Consolidated Balance Sheets, and forward-delivery contracts were included in “Other” assets and “Accrued and other liabilities” within the Consolidated Balance Sheets. Gains realized on the conversion of IRLCs to loans for the three-month periods ended June 30, 2011 and 2010, totaled $3.8 million and $6.2 million, respectively. Gains realized on the conversion of IRLCs to loans for the six-month periods ended June 30, 2011 and 2010, totaled $6.5 million and $10.7 million, respectively. Offsetting these gains, losses from forward-delivery contracts and options on futures contracts used to hedge IRLCs totaled $2.0 million and $3.7 million for the three-month periods ended June 30, 2011 and 2010, respectively, and totaled $2.2 million and $4.9 million for the six-month periods ended June 30, 2011 and 2010, respectively. Net gains and losses related to forward-delivery contracts, options on futures contracts and IRLCs were included in “Financial services” revenues within the Consolidated Statements of Earnings.

At June 30, 2011, the excess of the aggregate fair value over the aggregate unpaid principal balance for mortgage loans held-for-sale measured at fair value was $247,000. At December 31, 2010, the excess of the aggregate unpaid principal balance over the aggregate fair value for mortgage loans held-for-sale measured at fair value was $86,000. These amounts were included in “Financial services” revenues within the Consolidated Statements of Earnings. At June 30, 2011, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $527,000 and an aggregate unpaid principal balance of $624,000. At December 31, 2010, the Company held two repurchased loans with payments 90 days or more past due that had an aggregate carrying value of $468,000 and an aggregate unpaid principal balance of $592,000.

While recorded fair values represent management’s best estimate based on data currently available, future changes in interest rates or in market prices for mortgage loans, among other factors, could materially impact these fair values.

The following table represents a reconciliation of changes in the fair values of Level 3 items (IRLCs) included in “Financial services” revenues within the Consolidated Statements of Earnings:

(in thousands)	2011		2010
Fair value at January 1	$	1,496	$	2,055
Additions	8,448		10,995
Gain realized on conversion to loans	(6,453)		(10,687)
Change in valuation of items held	(224)		709
Fair value at June 30	$	3,267	$	3,072

Nonfinancial Instruments

In accordance with ASC 820, the Company measures certain nonfinancial homebuilding assets at their fair values on a nonrecurring basis. (See Note 7, “Housing Inventories.”)

The following table summarizes the fair values of the Company’s nonfinancial assets that represent the fair values for communities and other homebuilding assets for which the Company recognized noncash impairment charges during the reporting periods:

	FAIR VALUE
(in thousands)	HIERARCHY	JUNE 30, 2011		DECEMBER 31, 2010
Housing inventory and inventory held-for-sale 1	Level 3	$	13,643	$	32,196
Other assets held-for-sale and investments in joint ventures 2	Level 3	1,291		3,068
Total		$	14,934	$	35,264

1

In accordance with ASC 330, the fair values of housing inventory and inventory held-for-sale that were impaired during 2011 totaled $13.6 million at June 30, 2011. The impairment charges related to these assets totaled $13.2 million for the six months ended June 30, 2011. At December 31, 2010, the fair values of housing inventory and inventory held-for-sale that were impaired during 2010 totaled $32.2 million. The impairment charges related to these assets totaled $33.3 million for the year ended December 31, 2010.

2

In accordance with ASC 330, the fair values of other assets held-for-sale that were impaired during 2010 totaled $1.6 million at December 31, 2010. The impairment charges related to these assets totaled $235,000 for the year ended December 31, 2010. In accordance with ASC 330, the fair values of investments in joint ventures that were impaired during 2011 totaled $1.3 million at June 30, 2011. The impairment charges related to these assets totaled $1.9 million for the six months ended June 30, 2011. At December 31, 2010, the fair values of investments in joint ventures that were impaired during 2010 totaled $1.4 million. The impairment charges related to these assets totaled $4.1 million for the year ended December 31, 2010.