Edgar Filing: MDC HOLDINGS INC

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Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from to

Commission file number 1-08951

M.D.C. HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)


Delaware		84-0622967
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4350 South Monaco Street, Suite 500 Denver, Colorado		80237
(Address of principal executive offices)		(Zip code)

(303) 773-1100

(Registrant’s telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $.01 par value		New York Stock Exchange
7% Senior Notes due December 2012		New York Stock Exchange
5¹/2% Senior Notes due May 2013		New York Stock Exchange
5³/8% Senior Notes due December 2014		New York Stock Exchange
5³/8% Senior Notes due July 2015		New York Stock Exchange
5⁵/8% Senior Notes due January 2020		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicated by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of June 30, 2010, the aggregate market value of the Registrants’ common stock held by non-affiliates of the Registrants was $1.0 billion based on the closing sales price of $26.95 per share as reported on the New York Stock Exchange.

As of January 31, 2011, the number of shares outstanding of Registrant’s common stock was 47,170,751.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of part III of this Form 10-K are incorporated by reference from the Registrant’s 2011 definitive proxy statement to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year.

M.D.C. HOLDINGS, INC.

FORM 10-K

For the Year Ended December 31, 2010

Table of Contents


		Page No.
PART I

ITEM 1.	Business		1
	(a) General Development of Business		1
	(b) Available Information		2
	(c) Financial Information About Industry Segments		2
	(d) Narrative Description of Business		2
ITEM 1A.	Risk Factors		11

ITEM 1B.	Unresolved Staff Comments		18

ITEM 2.	Properties		18

ITEM 3.	Legal Proceedings		18

ITEM 4.	Removed and Reserved		19

PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20

ITEM 6.	Selected Financial Data		22

ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk		69

ITEM 8.	Consolidated Financial Statements

ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		71

ITEM 9A.	Controls and Procedures		71

ITEM 9B.	Other Information		73

PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance		73

ITEM 11.	Executive Compensation		73

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		74

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence		74

ITEM 14.	Principal Accountant Fees and Services		74

PART IV
ITEM 15.	Exhibits and Financial Statement Schedules		75

SIGNATURES			81

(i)

M.D.C. HOLDINGS, INC.

FORM 10-K

PART I

Forward-Looking Statements.

Certain statements in this Annual Report on Form 10-K, as well as statements made by us in periodic press releases, oral statements made by our officials in the course of presentations about the Company and conference calls in connection with quarterly earnings releases, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding our business, financial condition, results of operation, cash flows, strategies and prospects. Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are reasonable, we cannot guarantee future results. These statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from those expressed or implied by the forward-looking statements. These factors include those described under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. However, any further disclosures made on related subjects in subsequent reports on Forms 10-K, 10-Q and 8-K should be consulted.

Item 1.

Business.

(a) General Development of Business

M.D.C. Holdings, Inc. is a Delaware corporation. We refer to M.D.C. Holdings, Inc. as the “Company,” “MDC,” “we” or “our” in this Annual Report on Form 10-K, and these designations include our subsidiaries unless we state otherwise. We have two primary operations, homebuilding and financial services. Our homebuilding operations consist of wholly-owned subsidiary companies that generally purchase finished lots for the construction and sale of single-family detached homes to first-time and first-time move-up homebuyers under the name “Richmond American Homes.” Our homebuilding operations are comprised of many homebuilding subdivisions that we consider to be our operating segments. Homebuilding subdivisions in a given market are aggregated into reportable segments as follows: (1) West (Arizona, California and Nevada); (2) Mountain (Colorado and Utah); (3) East (Maryland, which includes Maryland, Pennsylvania, Delaware and New Jersey, and Virginia, which includes Virginia and West Virginia); and (4) Other Homebuilding (Florida and Illinois).

Our Financial Services and Other segment consists of HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans, primarily for our homebuyers, American Home Insurance Agency, Inc. (“American Home Insurance”), which offers third-party insurance products to our homebuyers, and American Home Title and Escrow Company (“American Home Title”), which provides title agency services to the Company and our homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia. This segment also includes Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides to its customers, primarily our homebuilding subsidiaries and certain subcontractors of these homebuilding subsidiaries, products and completed operations coverage on homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions, and StarAmerican Insurance Ltd. (“StarAmerican”), a Hawaii corporation and a wholly-owned subsidiary of MDC, which beginning in June 2004, re-insures all Allegiant claims in excess of $50,000 per occurrence, up to $3.0 million per occurrence, subject to various aggregate limits.

(b) Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). Anyone seeking information about our business can receive copies of our 2010 Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports and other documents filed with the SEC at the public reference section of the SEC at 100 F Street, NE, Room 1580, Washington, D.C. 20549. These documents also may be obtained, free of charge, by: contacting our Investor Relations office at (720) 773-1100; writing to M.D.C. Holdings, Inc., Investor Relations, 4350 South Monaco Street, Suite 500, Denver, Colorado 80237; or accessing our website at www.richmondamerican.com. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, available on our website as soon as reasonably practicable after we file or furnish the materials electronically with the SEC. To obtain any of this information, go to www.richmondamerican.com, select “Investors,” “Financial Reports” and “SEC Filings.” Our website also includes our: (1) Corporate Governance Guidelines; (2) Corporate Code of Conduct; (3) Rules for Senior Financial Officers; (4) Audit Committee Procedures for Handling Confidential Complaints; and (5) charters for the Audit, Compensation and Corporate Governance/Nominating Committees. These materials may be obtained, free of charge, at our website, http://ir.richmondamerican.com (select “Corporate Governance”).

Note 4 to the Consolidated Financial Statements contains information regarding our reportable segments for each of the years ended December 31, 2010, 2009 and 2008.

(d) Narrative Description of Business

Our business consists of two primary operations, homebuilding and financial services. We build and sell primarily single-family detached homes that are designed and built to meet local customer preferences. We are the general contractor for all of our projects and retain subcontractors for land development and home construction. The base selling prices for our homes closed during 2010 ranged primarily from approximately $170,000 to $450,000. We build a variety of home styles in each of our markets, targeting generally first-time and first-time move-up homebuyers. Also, we build a limited number of homes for the second-time move-up and luxury homebuyers.

Our financial services include subsidiary businesses which primarily provide mortgage financing, title insurance and homeowner insurance for our homebuyers.

Homebuilding Operations.

Our homebuilding subsidiaries sell and close homes in geographically diverse markets. Our home sales revenue for the years ended December 31, 2010, 2009 and 2008 is set forth in the table below for each market within our homebuilding segments (dollars in thousands).


	Total Homes Sales Revenue									Percent of Total
	2010			2009			2008			2010			2009			2008
Arizona	$	111,674		$	151,175		$	284,279			12	%		18	%		21	%
California		112,432			122,309			253,400			12	%		15	%		19	%
Nevada		103,582			104,844			193,640			12	%		12	%		14	%

West		327,688			378,328			731,319			36	%		45	%		54	%


Colorado		247,705			178,827			202,882			27	%		21	%		15	%
Utah		104,296			66,035			89,500			11	%		8	%		6	%

Mountain		352,001			244,862			292,382			38	%		29	%		21	%


Maryland		101,501			84,470			126,490			11	%		10	%		9	%
Virginia		110,819			91,602			116,867			12	%		11	%		9	%

East		212,320			176,072			243,357			23	%		21	%		18	%


Florida		44,801			45,896			80,132			5	%		5	%		6	%
Illinois		—			6,887			25,742			0	%		1	%		2	%

Other Homebuilding		44,801			52,783			105,874			5	%		6	%		8	%


Intercompany adjustments		(15,788	)		(14,991	)		(14,784	)		-2	%		-1	%		-1	%


Total	$	921,022		$	837,054		$	1,358,148			100	%		100	%		100	%

Economies of Scale. We believe the size of our homebuilding business and our scale of operations has afforded us benefits such as:

•

the ability to negotiate volume contracts with material suppliers and subcontractors;

•

access to affordable insurance coverage; and

•

access to lower cost capital.

Operating Divisions. In our homebuilding segments, our primary functions include land acquisition and development, home construction, purchasing, sales and marketing, and customer service. Operating decisions are made on a subdivision-by-subdivision basis under the oversight of our Chief Operating Decision Makers (“CODMs”), defined as our Chief Executive Officer and Chief Operating Officer. Generally, each operating division consists of a division president, land procurement, sales, construction, customer service, finance, purchasing, and office staff. The Company’s organizational structure (i.e. the grouping and reporting of subdivisions and divisions) changes based upon the current needs of the Company. At December 31, 2010 and 2009, we had 9 homebuilding operating divisions. Officers of our divisions generally receive performance-related bonuses based upon achieving targeted financial and operational results in their respective operating divisions.

Corporate Management. We manage our homebuilding business primarily through members of senior management in our Corporate segment and our Asset Management Committees (“AMCs”). Each AMC is comprised of the COO and two of the Company’s corporate officers or employees. Two of the AMCs review and approve all subdivision acquisition transactions in accordance with land resource allocation decisions made by the CODMs. Land acquisition transactions may not proceed without approval by the AMC and/or our CODMs. Generally, the role of our senior management team and/or AMC includes:

•

review and approval of division business plans and budgets;

•

oversight of land and home inventory levels;

•

review of major personnel decisions; and

•

review of capital allocation decisions.

Additionally, our corporate executives and corporate and national departments generally are responsible for establishing and monitoring compliance with our policies and procedures. Among other things, the corporate office has primary responsibility for:

•

asset management and capital allocation;

•

treasury;

•

risk management;

•

merchandising and marketing;

•

purchasing;

•

accounting, tax and internal audit functions;

•

legal matters;

•

human resources and payroll;

•

information technology; and

•

training and development.

Housing. Generally, we build single-family detached homes in a number of standardized series, designed to provide variety in the size and style of homes for our potential homebuyers. Within each series, we build several different floor plans offering standard and optional features (such as upgraded appliances, cabinetry, flooring, etc.). Differences in sales prices of similar models from market-to-market depend primarily upon different costs (e.g. land acquisition costs), homebuyer demand, home prices offered by our competitors, market conditions impacting our sub-markets (such as home foreclosure levels), location, optional features and design specifications. The series of homes offered at a particular location is based on perceived customer preferences, lot size, area demographics and, in certain cases, the requirements of major land sellers and local municipalities.

We seek to maintain limited levels of inventories of unsold homes in our markets. Unsold homes in various stages of completion allow us to meet the immediate and near-term demands of prospective homebuyers. In our efforts to mitigate the risk of carrying excess inventory, we have developed procedures through which we attempt to control the number of our unsold homes under construction and the number of homes in inventory due to home order cancellations. The table below shows the stage of construction for our unsold homes completed or under construction, number of sold homes under construction and model homes (in units).


	December 31,
	2010		2009		2008
Unsold Homes Under Construction - Final		119		41		451
Unsold Homes Under Construction - Frame		722		389		329
Unsold Homes Under Construction - Foundation		103		109		41

Total Unsold Homes Under Construction		944		539		821
Sold Homes Under Construction		609		570		409
Model Homes		242		212		387

Total		1,795		1,321		1,617

Land Acquisition and Development. We acquire our lots with the intention of constructing and selling homes on the acquired land. Generally, we purchase finished lots using option contracts, in phases or in bulk for cash. However, under certain circumstances, we may acquire entitled land for development into finished lots when we believe that the risk is justified. In making land purchases, we consider a number of factors, including projected rates of return, estimated Home Gross Margins (defined as home sales revenue less home cost of sales as a percent of home sales revenue), sales prices of the homes to be built, population and employment growth patterns, proximity to developed areas, estimated costs of development, estimated levels of competition and demographic trends. Generally, we acquire finished lots and land for development only in areas that will have, among other things, available building permits, utilities and suitable zoning. We attempt to maintain a supply of finished lots sufficient to enable us to start homes promptly after a contract for a home sale is executed. See “Forward-Looking Statements” above.

In our option contracts, we generally obtain the right to purchase lots in consideration for an option deposit in the form of cash or letters of credit. In the event we elect not to purchase the lots within a specified period of time, we may be required to forfeit the option deposit. Our option contracts generally do not contain provisions requiring our specific performance. During the years ended December 31, 2010, 2009 and 2008, we wrote-off lot option deposits and pre-acquisition costs of $3.1 million, $2.9 million and $6.8 million, respectively, which have been included in other operating expenses in the Consolidated Statements of Operations. At December 31, 2010, we had the right to acquire 4,159 lots under option contracts, with $9.0 million of cash and $4.5 million of letters of credit option deposits at risk.

From time to time, we may own or have the right under option contracts to acquire undeveloped parcels of real estate that we intend to develop into finished lots. We develop our land in phases in order to limit our risk in a particular subdivision and to efficiently employ available resources. Building permits and utilities are available and zoning is suitable for the current intended use of substantially all of our undeveloped land. When developed, these lots generally will be used in our homebuilding activities. See “Forward-Looking Statements” above.

The table below shows the carrying value of land and land under development, by homebuilding segment, at December 31, 2010, 2009 and 2008 (in thousands).


	December 31,
	2010		2009		2008
West	$	167,691	$	97,220	$	58,244
Mountain		159,184		121,499		129,327
East		75,865		35,572		46,928
Other Homebuilding		12,497		8,569		7,072

Total	$	415,237	$	262,860	$	241,571

The table below shows the number of lots owned and controlled under option (excluding lots in housing completed or under construction), by homebuilding segment, at December 31, 2010, 2009 and 2008 (in units).


	December 31,
	2010		2009		2008
Lots Owned
West		3,449		2,622		3,408
Mountain		3,513		3,059		3,239
East		733		423		532
Other Homebuilding		340		279		398

Total		8,035		6,383		7,577


Lots Controlled Under Option
West		1,468		663		716
Mountain		1,081		654		184
East		877		767		987
Other Homebuilding		733		500		471

Total		4,159		2,584		2,358


Total Lots Owned and Controlled		12,194		8,967		9,935

The table below shows the amount of at risk option deposits (in thousands).


	December 31,
	2010		2009		2008
Cash	$	9,019	$	7,654	$	5,145
Letters of Credit		4,467		2,134		4,358

Total At Risk Option Deposits	$	13,486	$	9,788	$	9,503

Labor and Raw Materials. For the most part, materials used in our homebuilding operations are standard items carried by major suppliers. We generally contract for our materials and labor at a fixed price for the anticipated construction period of our homes. This allows us to mitigate the risks associated with increases in building materials and labor costs between the time construction begins on a home and the time it is closed. Increases in the cost of building materials and subcontracted labor may reduce Home Gross Margins to the extent that market conditions prevent the recovery of increased costs through higher home sales prices. From time to time and to varying degrees, we may experience shortages in the availability of building materials and/or labor in each of our markets. These shortages and delays may result in delays in the delivery of homes under construction, reduced Home Gross Margins, or both. See “Forward-Looking Statements” above.

Warranty. Our homes are sold with limited third-party warranties that generally provide for ten years of structural coverage, two years of coverage for plumbing, electrical, heating, ventilation and air conditioning systems, and one year of coverage for workmanship and materials. Under our agreement with the issuer of the third-party warranties, we are responsible for performing all of the work for the first two years of the warranty coverage, and substantially all of the work required to be performed during years three through ten of the warranties.

Seasonal Nature of Business. The homebuilding industry can experience noticeable seasonality and quarter-to-quarter variability in homebuilding activity levels. The seasonal nature of our business is described in more detail in our description of Risk Factors under the heading “Because of the seasonal nature of our business, our quarterly operating results can fluctuate.”

Backlog. At December 31, 2010 and 2009, homes under contract but not yet delivered (“Backlog”) totaled 842 and 826, respectively, with an estimated sales value of $269 million and $265 million, respectively. Our Cancellation Rates (as defined below) were 30% and 24% for the years ended December 31, 2010 and 2009, respectively. We define our home order “Cancellation Rate” as the approximate number of cancelled home order contracts during a reporting period as a percent of total home order contracts received during such reporting period. We anticipate that homes in Backlog at December 31, 2010 will close during 2011 under their existing home order contracts or through the replacement of an existing contract with a new home order contract. The estimated Backlog sales value at December 31, 2010 may be impacted by, among other things, subsequent home order cancellations and incentives provided after contract but prior to closing. See “Forward-Looking Statements” above.

The table below discloses our Backlog at December 31, 2010 and 2009 for each market within our homebuilding segments (dollars in thousands).


	December 31,				Increase (Decrease)
	2010		2009		Amount			%
Backlog (*Units*)
Arizona		84		103		(19	)		-18	%
California		79		76		3			4	%
Nevada		76		88		(12	)		-14	%

West		239		267		(28	)		-10	%


Colorado		273		207		66			32	%
Utah		69		94		(25	)		-27	%

Mountain		342		301		41			14	%



Maryland		126		126		—			0	%
Virginia		70		73		(3	)		-4	%

East		196		199		(3	)		-2	%


Florida		64		59		5			8	%
Illinois		1		—		1			N/M	*

Other Homebuilding		65		59		6			10	%


Total		842		826		16			2	%


Estimated Backlog Sales Value	$	269,000	$	265,000	$	4,000			2	%


Estimated Average Sales Price in Backlog	$	319.5	$	320.8	$	(1.3	)		0	%

*	N/M – Not Meaningful

Our December 31, 2010 Backlog increased by 16 units from December 31, 2009, attributable to the Colorado market of our Mountain segment as net orders for homes in this market increased during the year ended December 31, 2010, compared with the year ended December 31, 2009.

Customer Service and Quality Control. Our homebuilding divisions are responsible for pre-closing quality control inspections and responding to customers’ post-closing needs. We have a product service and quality control program, focused on improving and/or maintaining the quality of our customers’ complete home buying and homeownership experience.

Marketing and Sales. We evaluate our marketing and sales programs and initiatives in order to attract homebuyers in a cost effective manner. To communicate our Richmond American Homes brand and sales promotions, we have a centralized in-house advertising and marketing department that generally oversees the communication of the Company’s brand and promotion efforts. The main objective of this department is to direct potential homebuyers to our sales offices, Home Galleries and Homebuyer Resource Centers through our richmondamerican.com website and various advertising outlets. In addition, our in-house corporate communications team manages our public relations and employee communications, and maintains our website.

To complement our marketing efforts, our in-house merchandising team furnishes our model homes and sales offices with the objective of providing a consistent presentation in developing our Richmond American Homes brand.

Our home sales strategy is directed at communicating the inherent value of our homes to our prospective homebuyers and distinguishing our product and pricing (including incentives) from our competitors or other home buying opportunities. In the sales process, we negotiate the terms of a home sales contract with a prospective homebuyer, including base sales price, any options and upgrades (such as upgraded appliances, cabinetry, flooring, etc.), and any

home sales incentives. Our incentives are generally in the form of: (1) discounts on the sales price of the home; (2) homebuyer closing cost assistance paid by Richmond American Homes to a third-party; (3) mortgage loan origination fees paid by Richmond American Homes to HomeAmerican; and (4) interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing. Additionally, our home sales strategy also includes deploying capital to build limited supplies of new, more affordable inventory with the requirement that the construction of these homes stops at drywall. This allows our potential homebuyers to have the opportunity to personalize the homes with upgrades from one of our Home Galleries or design centers. We believe that this strategy will help us to turn our inventories more quickly while we maintain Home Gross Margins similar to those received for build-to-order homes. See “Forward-Looking Statements” above.

Home Gallery and Design Center. Another important part of our marketing presentation takes place in our design centers, which are located in most of our homebuilding markets. Homebuyers are able to customize certain features of their homes by selecting from a variety of options and upgrades. Our Home Gallery concept provides sales support and customized options for prospective homebuyers to personalize their new homes. These retail locations also serve as a resource to homebuyers who are interested in purchasing a new home from us. Prospective homebuyers can receive individualized attention from a trained team of new home specialists, resulting in a more focused, efficient home search.

Competition. The homebuilding industry is fragmented and highly competitive. The competitive nature of our business is described in more detail in our description of Risk Factors under the heading “Increased competition levels in the homebuilding and mortgage lending industries could result in lower net home orders, closings and decreases in the average selling prices of sold and closed homes, which could have a negative impact on our home sales revenue and results of operations.”

Regulation. Our homebuilding operations are subject to compliance with applicable laws and regulations, which are described in more detail in our description of Risk Factors under the heading “Our business is subject to numerous federal, local, state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.”

Bonds and Letters of Credit. We are often required to obtain performance bonds and/or letters of credit in support of our obligations, primarily for land development and subdivision improvements, homeowner association dues and start-up expenses, land maintenance work required by local municipalities and/or homeowner associations, contractor license fees and earnest money deposits. At December 31, 2010 and 2009, we had outstanding performance bonds totaling $74.2 million and $118.4 million, respectively, and letters of credit totaling $15.7 million and $21.4 million, respectively, including $6.4 million and $4.2 million, respectively, issued by HomeAmerican. In the event performance bonds or letters of credit issued by third-parties are called, our indemnity obligations could require us to reimburse the issuer of the performance bond or letter of credit. See “Forward-Looking Statements” above.

In certain states, we are restricted from using earnest money deposits (“Deposits”) for general purposes, unless we take measures to release state imposed restrictions on the Deposits received from homebuyers in conjunction with home sales, which may include posting blanket security bonds. In this regard, at December 31, 2010 and 2009, we had $4.5 million outstanding in blanket security bonds used to release restrictions on certain Deposits. Additionally, we had $0.4 million and $0.5 million in restricted cash related to Deposits at December 31, 2010 and 2009, respectively. We monitor the amount of Deposits we hold in certain states to confirm that our blanket security bonds exceed the amount of the Deposits.

Financial Services and Other Segment.

Mortgage Lending Operations.

General. HomeAmerican is a full-service mortgage lender and the principal originator of mortgage loans for our homebuyers. HomeAmerican has a centralized loan processing center where it originates mortgage loans, primarily

for our homebuyers. HomeAmerican also brokers mortgage loans for origination by outside lending institutions for our homebuyers.

HomeAmerican is authorized to originate Federal Housing Administration-insured (“FHA”), Veterans Administration-guaranteed (“VA”), Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) (together “the government sponsored entities”) and private investor mortgage loans. HomeAmerican also is an authorized loan servicer for Fannie Mae and Freddie Mac and, as such, is subject to the rules and regulations of these entities.

HomeAmerican uses a mortgage repurchase facility, in addition to Company generated funds, to finance the origination of mortgage loans until they are sold. HomeAmerican generally sells originated mortgage loans to third-party purchasers on either a bulk or flow basis. Mortgage loans sold on a bulk basis generally include the sale of a package of substantially similar originated mortgage loans, while sales of mortgage loans on a flow basis generally are completed as HomeAmerican originates each loan. Mortgage loans sold to third-party purchasers generally include HomeAmerican’s representations and warranties with respect to certain borrower payment defaults, credit quality issues and/or misrepresentations made by us or our homebuyers. Substantially all of the mortgage loans originated by HomeAmerican are sold to third-party purchasers within 45 days of origination.

Concurrent with the sale of mortgage loans to third-party purchasers, HomeAmerican generally sells the rights to service those loans. HomeAmerican’s portfolio of mortgage loan servicing for others at December 31, 2010 and 2009 consisted of 502 and 574 mortgage loans, respectively, with unpaid principal balances of approximately $72.5 million and $81.3 million, respectively, and did not contribute significantly to our results of operations.

There are a limited number of third-party purchasers of mortgage loans and, at any given point in time, our business may be impacted adversely if one of them were no longer able or willing to purchase mortgage loans originated by HomeAmerican. The following table sets forth the percent of mortgage loans sold by HomeAmerican to its primary third party purchasers during 2010, 2009 and 2008.


	Year Ended December 31,
	2010			2009			2008
Wells Fargo Funding, Inc.		44	%		45	%		59	%
Bank of America, N.A.		38	%		34	%		23	%
JPMorgan Chase Bank, N.A.		16	%		18	%		13	%

Pipeline. HomeAmerican’s mortgage loans in process that had not closed (the “Pipeline”) at December 31, 2010 and 2009 had an aggregate principal balance of approximately $34.5 million and $63.5 million, respectively, of which $32.7 million and $51.7 million, respectively, were under interest rate lock commitments (“IRLC”) at an average interest rate of 4.17% and 4.65%, respectively. In addition, HomeAmerican had $65.1 million and $62.3 million of mortgage loans held-for-sale at December 31, 2010 and 2009, respectively. HomeAmerican uses forward sales of mortgage-backed securities and commitments to sell whole loans to hedge the interest rate risk inherent in the IRLC and its loan inventory held-for-sale. See “Forward-Looking Statements” above.

Forward Sales Commitments. HomeAmerican is exposed to market risks related to fluctuations in interest rates due to its mortgage loan inventory. Derivative instruments used in the normal course of business by HomeAmerican include forward sales of mortgage-backed securities, commitments to sell whole loans and commitments to originate mortgage loans. HomeAmerican utilizes forward mortgage securities contracts to manage the price risk due to fluctuations in interest rates on our mortgage loans owned and the IRLC. Such contracts are the only significant financial derivative instruments used by us and generally are settled within 60 days of origination. Due to this economic hedging activity, we believe the market risk associated with HomeAmerican’s mortgages is limited. Reported gains on sales of mortgage loans may vary significantly from period to period depending on the volatility in the interest rate market. See “Forward-Looking Statements” above.

Competition. The mortgage industry is fragmented and highly competitive. The competitive nature of our business is described in more detail in our description of Risk Factors under the heading “Increased competition levels in the homebuilding and mortgage lending industries could result in lower net home orders, closings and decreases in the

average selling prices of sold and closed homes, which could have a negative impact on our home sales revenue and results of operations.”

Regulation. Our mortgage lending operations are subject to compliance with applicable laws and regulations, which are described in more detail in our description of Risk Factors under the heading “Risks Relating to our Business—Our business is subject to numerous federal, local, state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.”

Insurance Operations.

Our insurance operations consist of three business divisions: (1) Allegiant; (2) StarAmerican; and (3) American Home Insurance.

Allegiant and StarAmerican were formed to provide insurance coverage of homebuilding risks for the Company, its homebuilding subsidiaries and certain of its homebuilding subcontractors. Allegiant was organized as a risk retention group under the Federal Liability Risk Retention Act of 1981. Allegiant, which began operations in June of 2004, is licensed as a Class 3 Stock Insurance Company by the Division of Insurance of the State of Hawaii and is subject primarily to the regulations of its state of incorporation. StarAmerican is a single parent captive insurance company licensed by the Division of Insurance of the State of Hawaii and is a wholly owned subsidiary of MDC. Pursuant to agreements beginning in June 2004, StarAmerican re-insures Allegiant for all claims in excess of $50,000 per occurrence up to $3.0 million per occurrence, subject to various aggregate limits.

Allegiant generates premium revenue by providing to its customers products and completed operations coverage on homes sold by our homebuilding subsidiaries and for work performed in completed subdivisions. Allegiant seeks to provide to its customers coverage and insurance rates that are competitive with other insurers. StarAmerican generates premium revenue by providing re-insurance coverage to Allegiant. Allegiant and StarAmerican incur expenses for actual losses and loss adjustment expenses and for reserves established based on actuarial studies provided by an independent third-party actuary that include known facts, including the Company’s experience with similar insurance cases and historical trends involving insurance claim payment patterns, pending levels of unpaid insurance claims, claim severity, claim frequency patterns and interpretations of circumstances including changing regulatory and legal environments.

Regulations. Allegiant and StarAmerican are licensed in the State of Hawaii and, therefore, are subject to regulation by the Hawaii Insurance Division. This regulation includes restrictions and oversight regarding: types of insurance provided; investment options; required capital and surplus; financial and information reporting; use of auditors, actuaries and other service providers; periodic examinations; and other operational items. Additionally, as a risk retention group, Allegiant also is registered in other states where certain MDC homebuilding subsidiaries do business.

American Home Insurance is an insurance agency, which provides homebuyers with personal property and casualty insurance products in the same markets as our homebuilding subsidiaries.

Title Operations.

American Home Title provides title agency services to the Company and our homebuyers in Colorado, Florida, Illinois, Maryland, Nevada and Virginia.

Employees.

The table below summarizes the approximate number of employees for our homebuilding, Financial Services and Other and Corporate segments at December 31, 2010 and 2009.


	December 31,
	2010		2009
Homebuilding segments		763		721
Financial Services and Other		92		98
Corporate		264		270

Total		1,119		1,089

Item 1A.

Risk Factors.

The homebuilding industry is undergoing a significant downturn, and its duration and ultimate severity are uncertain. A continuation or further deterioration in industry conditions or in the broader economic conditions could have additional adverse effects on our business and financial results.

The downturn in the homebuilding industry is in its fifth year, and it has become one of the most severe housing downturns in U.S. history. The significant declines in the demand for new homes, the significant oversupply of homes on the market and the significant reductions in the availability of financing for homebuyers that have marked the downturn are continuing. We have experienced uncertainty and continued low demand for new homes, which negatively impacted our financial and operating results during the year ending December 31, 2010. It is not clear when these trends will reverse or when we will return to profitability.

Our ability to respond to the downturn has been limited by adverse industry and economic conditions. The significant amount of home mortgage foreclosures has increased supply and driven down home selling prices, making the purchase of a foreclosed home an attractive alternative to purchasing a new home. Homebuilders have responded with significant concessions, further adding to the price declines. With the decline in the values of homes and in the inability of some homeowners to make their mortgage payments, the credit markets have been significantly disrupted, putting strains on many households and businesses. In the face of these conditions, weak economic conditions have continued, with high unemployment levels and overall low consumer confidence, particularly regarding the housing market. As a result, demand for new homes remains at historically low levels.

If the downturn in the homebuilding and mortgage lending industries continues or intensifies, or if the national economy weakens, we could continue to experience declines in the market value of our inventory and demand for our homes, which could have a significant negative impact on our Home Gross Margins (which means our home sales revenue less home cost of sales as a percentage of home sales revenue) and financial and operating results. Additionally, if energy costs should increase, demand for our homes could be adversely impacted (because we are primarily a suburban residential builder), and the cost of building homes may increase, both of which could have a significant negative impact on our Home Gross Margins and financial and operating results.

Additionally, as a result of the difficult economic environment, we may be subject to increased counterparty risks whereby third-parties, which may include, among others, banks under our letter of credit facilities and mortgage repurchase facility, may not be willing or able to perform on obligations to us. To the extent a third-party is unable to meet its obligations to us, our financial position, results of operations and/or cash flows could be negatively impacted.

These challenging conditions are complex and interrelated. We cannot predict their duration or ultimate severity. Nor can we provide assurance that our responses to the homebuilding downturn or the government’s attempts to address the troubles in the overall economy will be successful.

Increased competition levels in the homebuilding and mortgage lending industries could result in lower net home orders, closings and decreases in the average selling prices of sold and closed homes, which would have a negative impact on our home sales revenue and results of operations.

The homebuilding industry is fragmented and highly competitive. Our homebuilding subsidiaries compete with numerous public and private homebuilders, including a number that are substantially larger and have greater financial resources than we do. Our homebuilding subsidiaries also compete with subdivision developers and land development companies, some of which are themselves homebuilders or affiliates of homebuilders. Homebuilders compete for customers, land, building materials, subcontractor labor and desirable financing. Competition for home orders primarily

is based upon home sales price, home style, financing available to prospective homebuyers, location of property, quality of homes built, customer service and general reputation in the community, and may vary market-by-market and/or submarket-by-submarket. Additionally, competition within the homebuilding industry can be impacted through an excess supply of new and existing homes available for sale resulting from a number of factors including, among other things, increases in speculative homes available for sale and increases in home foreclosures. Increased competition, including lower home sales prices offered by our competitors as experienced during 2010, can cause us to decrease our home sales prices and/or increase home sales incentives in an effort to generate new home sales and maintain homes in Backlog (homes under contract but not yet delivered) until they close. These competitive pressures are likely to continue for some time and could affect our ability to maintain existing home sales prices and require that we provide additional incentives, which would negatively impact our future financial and operating results.

Through our mortgage lending subsidiary, HomeAmerican, we also compete with numerous banks, thrifts and other mortgage bankers and brokers, many of which are larger and may have greater financial resources than we do. Competitive factors include pricing, mortgage loan terms, underwriting criteria and customer service. To the extent that we are unable to adequately compete with other companies that originate mortgage loans, total revenue and the results of operations from our Financial Services and Other segment may be negatively impacted.

Further decline in the market value of our homes or carrying value of our land would have a negative impact on our results of operations and financial position.

Our homebuilding subsidiaries acquire land for the replacement of land inventory and/or expansion within our current markets and may, from time to time, purchase land for expansion into new markets. The fair value of our land and land under development and housing completed or under construction inventory depends on market conditions. Factors that can impact our determination of the fair value of our inventory primarily include home sales prices, levels of home sales incentives and home construction costs. Our home sales prices and/or levels of home sales incentives can be impacted by, among other things, decreased demand for new homes, decreased home prices offered by our competitors, home foreclosure levels, decreased ability of our homebuyers to obtain suitable mortgage loan financing and high levels of home order cancellations. Additionally, our home construction costs can be impacted by, among other things, shortages of subcontractor labor and changes in costs associated with subcontracted labor, building materials and other resources. If we are required to decrease home sales prices and/or increase incentives in an effort to generate new home sales, maintain homes in Backlog until they close or remain competitive with the home sales prices offered by our competitors, or if our home construction costs increase, we may not be able to recover the carrying costs of our inventory when our homebuilding subsidiaries build and sell homes. Under such circumstances, we would be required to record additional impairments of our inventory. Additionally, due to the uncertainty in the homebuilding and mortgage lending industries and the overall United States economy, it is reasonably possible for us to experience declines in the market value of our homes and, as a result, additional inventory impairments could be recorded in future reporting periods. Any such additional inventory impairments would have a negative impact on our financial position and results of operations in the future reporting period in which they were recorded.

Our strategies in responding to the adverse conditions in the homebuilding industry and in the U.S. economy have had limited success, and the continued implementation of these and other strategies may not be successful.

Our strategies of responding to the current economic environment have been focused on among other things: enhancing our sales and marketing efforts; purchasing and/or contracting for the purchase of land; and reducing general and administrative expenses. We continue to monitor and modify our strategies in responding to the current economic environment and the effectiveness of these strategies in future reporting periods is unknown. To the extent they are not successful, our financial and operating results may be adversely impacted.

Increases in our Cancellation Rate could have a negative impact on our Home Gross Margins and home sales revenue.

Home order cancellations can result from a number of factors, including declines, and/or slow or no appreciation, in the market value of homes, increases in the supply of homes available to be purchased, increased competition, higher mortgage interest rates, homebuyers’ inability to sell their existing homes, homebuyers’ inability to obtain suitable financing, including providing sufficient down payments, and adverse changes in economic conditions.

Increased levels of home order cancellations would have a negative impact on our home sales revenue and financial and operating results in future reporting periods.

If land is not available at reasonable prices, our homes sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

Our operations depend on our homebuilding subsidiaries’ ability to obtain land for the development of our residential communities at reasonable prices and with terms that meet our underwriting criteria. Our ability to obtain land for new residential communities may be adversely affected by changes in the general availability of land, the willingness of land sellers to sell land at reasonable prices given the deterioration in market conditions, competition for available land, availability of financing to acquire land, zoning, regulations that limit housing density, and other market conditions. If the supply of land, and especially finished lots, appropriate for development of residential communities continues to be limited because of these factors, or for any other reason, the number of homes that our homebuilding subsidiaries build and sell may decline. Additionally, the ability of our homebuilding subsidiaries to open new subdivisions could be impacted if we elect not to purchase lots under option contracts. To the extent that we are unable to timely purchase land or enter into new contracts for the purchase of land at reasonable prices, due to the lag time between the time we acquire land and the time we begin selling homes, our home sales revenue and results of operations could be negatively impacted and/or we could be required to scale back our operations in a given market.

If mortgage interest rates rise or if mortgage financing otherwise becomes less affordable, it could adversely affect our sales and business, and the duration and ultimate severity of the effects are uncertain.

During the last four years, the mortgage lending industry has experienced significant instability, beginning with increased defaults on subprime loans and other nonconforming loans and compounded by expectations of increasing interest payment requirements and further defaults. This in turn resulted in a decline in the market value of many mortgage loans and related securities. Lenders, regulators and others questioned the adequacy of lending standards and other credit requirements for several loan products and programs offered in prior years. Credit requirements tightened, and investor demand for mortgage loans and mortgage-backed securities declined. The deterioration in credit quality has caused almost all lenders to eliminate subprime mortgages and most other loan products that are not eligible for sale to Fannie Mae or Freddie Mac or loans that do not meet FHA and VA requirements. Fewer loan products, tighter loan qualifications and a reduced willingness of lenders to make loans in turn have made it more difficult for many buyers to finance the purchase of our homes. These factors have served to reduce the pool of qualified homebuyers and made it more difficult to sell to first-time and move-up buyers which have long made up a substantial part of our customers. These reductions in demand have adversely affected our business and financial results, and the duration and severity of the effects are uncertain.

We believe that the liquidity provided by Fannie Mae and Freddie Mac to the mortgage industry has been very important to the housing market. These entities have required substantial injections of capital from the federal government and may require additional government support in the future. Any reduction in the availability of the financing provided by these institutions could adversely affect interest rates, mortgage availability and our sales of new homes and mortgage loans.

Because of the decline in the availability of other mortgage products, FHA and VA mortgage financing support has become a more important factor in marketing our homes. The American Housing Rescue and Foreclosure Prevention Act of 2008, however, increased a buyer’s down payment requirement for FHA insured loans. In addition, increased demands on the FHA have resulted in a reduction of its cash reserves. These factors or further increases in down payment requirements or limitations or restrictions on the availability of FHA and VA financing support could adversely affect interest rates, mortgage availability and our sales of new homes and mortgage loans.

Even if potential customers do not need financing, changes in the availability of mortgage products may make it harder for them to sell their current homes to potential buyers who need financing.

If interest rates increase, the costs of owning a home will be affected and could result in further reductions in the demand for our homes. Similarly, potential changes to the tax code with respect to deduction of home mortgage interest payments or other changes may decrease affordability of homeownership.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and continued disruptions in these markets could have an adverse impact on our results of operations, financial position and/or cash flows.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets. Reduced investor demand for mortgage loans and mortgage-backed securities in the secondary mortgage markets and increased investor yield requirements for those loans and securities and the exit of third-party purchasers from the secondary market may have an adverse impact on our results of operations, financial position and/or cash flows. In addition, the sources and terms and conditions of warehouse financing and mortgage repurchase arrangements and other lending arrangements for the mortgage lending industry are changing. These changes can impact, among other things, availability of capital, terms and structures for debt and line of credit agreements, collateral requirements and collateral advance rates. Additionally, while certain governmental organizations and other mortgage industry participants have taken steps to ease the downturn in the credit and capital markets, the on-going impact of their efforts, if any, on the homebuilding and mortgage lending industries is unknown.

In the ordinary course of business, we are required to obtain performance bonds, the unavailability of which could adversely affect our results of operations and/or cash flows.

As is customary in the homebuilding industry, we often are required to provide surety bonds to secure our performance under construction contracts, development agreements and other arrangements. Our ability to obtain surety bonds primarily depends upon our credit rating, capitalization, working capital, past performance, management expertise and certain external factors, including the overall capacity of the surety market and the underwriting practices of surety bond issuers. The ability to obtain surety bonds also can be impacted by the willingness of insurance companies to issue performance bonds. If we were unable to obtain surety bonds when required, our results of operations and/or cash flows could be adversely impacted.

Further uncertainty in the mortgage lending industry, including repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our results of operations.

We are subject to risks associated with mortgage loans, including, besides conventional mortgage loans, previously originated and sold Alt-A (as defined below), and sub-prime mortgage loans (as defined below), second mortgage loans, high loan-to-value mortgage loans and jumbo mortgage loans (mortgage loans with principal balances that exceed various thresholds in our markets). These risks may include, among other things, compliance with mortgage loan underwriting criteria and the associated homebuyers’ performance, which could require HomeAmerican to repurchase certain of those mortgage loans or provide indemnification. Repurchased mortgage loans could have a substantial impact on HomeAmerican’s results of operations, liquidity and cash flow as the existence of a defect that necessitated repurchase may require additional effort and expense incurred by HomeAmerican to cure the defect, the passage of time in order to cure or reduce the impact of an identified defect, a discounted sale of the repurchased loan due to the existence of a defect or, in the event that the loan has a defect and is non-performing, foreclosure and re-sale of the subject property.

During 2006 and 2005, HomeAmerican originated a significant number of second mortgage loans and Alt-A loans. However, subsequent to 2006, in response to the reduced liquidity in the mortgage lending industry, we tightened our mortgage loan underwriting criteria by discontinuing Alt-A mortgage loans, second mortgage loans, sub-prime mortgage loans and Non-Agency (defined as not being FHA, VA FNMA and FHLMC eligible) mortgage loans with combined-loan-to-values in excess of 95%. We define “Alt-A” loans as loans that would otherwise qualify as prime loans except that they do not comply in all ways with the documentation standards of the government sponsored enterprise guidelines. We define “sub-prime” mortgage loans as non-government insured mortgage loans that have Fair, Isaac & Company (FICO) scores less than or equal to 620. In the event we experience a significant increase in the number of Alt-A mortgage loans originated prior to 2008 that we are required to repurchase, our results of operations and cash flows would be adversely impacted.

Decreases in the market value of our investments in marketable securities could have an adverse impact on our results of operations.

We have invested $934.2 million in marketable securities during the year ended December 31, 2010, the market value of which is subject to changes from period to period. Decreases in the market value of our marketable securities could have an adverse impact on our results of operations.

Effective October 1, 2010, we began utilizing a new enterprise resource planning (“ERP”) system in two of our homebuilding divisions and, if we encounter significant problems with this implementation or implementation throughout our remaining homebuilding divisions, it could have an adverse impact on our operating activities and/or financial reporting capabilities.

Effective October 1, 2010, we began utilizing a new ERP system in two of our homebuilding divisions. The full implementation of this system throughout all of our homebuilding divisions is scheduled to take place over the course of the next several quarters and, to the extent that we encounter significant problems, delays or disruptions in our implementation process, our ability to effectively monitor and manage our operating activities and/or financial reporting capabilities could be adversely impacted.

Our financial services operations have concentration risks that could impact our results of operations.

There are a limited number of third-party purchasers of mortgage loans and, at any given point in time, our business may be impacted adversely if one of them was no longer able or willing to purchase mortgage loans originated by HomeAmerican. Our operations could be impacted adversely due to reduced competition and having fewer bidders for originated mortgage loans we sell, which could result in us receiving a lower price for such originated mortgage loans.

Our business is subject to numerous federal, local and state laws and regulations concerning land development, construction of homes, sales, mortgage lending, environmental and other aspects of our business. These laws and regulations could give rise to additional liabilities or expenditures, or restrictions on our business.

Our operations are subject to continuing compliance requirements mandated by applicable federal, state and local statutes, ordinances, rules and regulations, including zoning and land use ordinances, building, plumbing and electrical codes, contractors’ licensing laws, state insurance laws, federal and state human resources laws and regulations and health and safety laws and regulations (including, but not limited to, those of the Occupational Safety & Health Administration). Various localities in which we operate have imposed (or may impose in the future) fees on developers to fund schools, road improvements and low and moderate-income housing.

From time to time, various municipalities in which our homebuilding subsidiaries operate restrict or place moratoria on the availability of utilities, including water and sewer taps. Additionally, certain jurisdictions in which our homebuilding subsidiaries operate have proposed or enacted “slow growth” or “no growth” initiatives and other measures that may restrict the number of building permits available in any given year. These initiatives or other slow or no growth measures could reduce our ability to open new subdivisions and build and sell homes in the affected markets and may create additional costs and administration requirements, which in turn could negatively impact our future home sales and results of operations. Although future conditions or governmental actions may impact our ability to obtain necessary permits or water and sewer taps, we currently believe that we have, or can obtain, water and sewer taps and building permits for our homebuilding subsidiaries’ land inventory and land held for development.

Our homebuilding operations also are affected by environmental laws and regulations pertaining to availability of water, municipal sewage treatment capacity, stormwater discharges, land use, hazardous waste disposal, dust controls, building materials, population density and preservation of endangered species, natural terrain and vegetation. Due to these considerations, our homebuilding subsidiaries generally obtain an environmental site assessment for parcels of land that they acquire. The particular environmental laws and regulations that apply to any given homebuilding project vary greatly according to a particular site’s location, the site’s environmental conditions and the present and former uses. These environmental laws may result in project delays, cause us to incur substantial compliance and other costs and/or prohibit or severely restrict homebuilding activity in certain environmentally sensitive locations.

We also are subject to rules and regulations with respect to originating, processing, selling and servicing mortgage loans, which, among other things: prohibit discrimination and establish underwriting guidelines; provide for audits and inspections; require appraisals and/or credit reports on prospective borrowers and disclosure of certain information concerning credit and settlement costs; establish maximum loan amounts; prohibit predatory lending

practices; and regulate the referral of business to affiliated entities. The turmoil caused by the increased number of defaults in subprime and other mortgages has encouraged consumer lawsuits and the investigation of financial services industry practices by governmental authorities. These investigations could include the examination of consumer lending practices, sales of mortgages to financial institutions and other investors and the practices in the financial services segments of homebuilding companies. New rules and regulations or revised interpretations of existing rules and regulations applicable to our mortgage lending operations could result in more stringent compliance standards, which may substantially increase costs of compliance. Additionally, potential changes to regulations, including but not limited to the Real Estate Settlement Procedures Act (RESPA) could have a significant impact on the ability of our affiliated businesses to provide services to Richmond American Homes customers, which could have a significant negative impact on our financial and operating results.

Product liability litigation and warranty claims that arise in the ordinary course of business may be costly.

As a homebuilder, we are subject to construction defect and home warranty claims, as well as claims associated with the sale and financing of our homes arising in the ordinary course of business. These types of claims can be costly. The costs of insuring against construction defect and product liability claims can be high and the amount of coverage offered by insurance companies may be limited. If we are not able to obtain adequate insurance against these claims, we may incur additional expenses that would have a negative impact on our results of operations in future reporting periods. Additionally, changes in the facts and circumstances of our pending litigation matters could have a material impact on our results of operations and cash flows in future reporting periods.

Litigation has been filed by homeowners in West Virginia against us and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The court has entered judgment by default in favor of certain of these homeowners. See “Business—Legal Proceedings.”

Our income tax provision or benefit and other tax liabilities may be insufficient if taxing authorities are successful in asserting tax positions that are contrary to our position.

From time to time, we are audited by various federal and state authorities regarding income tax matters. Significant judgment is required to determine our provision or benefit for income taxes and our liabilities for federal and state income taxes. Our current audits are in various stages of completion; however, no outcome for a particular audit can be determined with certainty prior to the conclusion of the audit, appeal and, in some cases, litigation process. Although we believe our approach to determining the appropriate tax treatment is supportable, it is possible that the final tax authority will take a tax position that is materially different than that which is reflected in our income tax provision or benefit and other tax liabilities. As each audit is completed, adjustments, if any, are recorded in our Consolidated Financial Statements in the period determined. Such differences could have a material adverse effect on our income tax provision or benefit, or other tax liabilities, in the reporting period in which such determination is made and, consequently, on our results of operations, financial position and/or cash flows for such period.

The homebuilding industry is cyclical and affected by changes in general economic, real estate or other business conditions that could adversely affect our business or financial results.

The homebuilding industry is cyclical and is significantly affected by changes in industry conditions, as well as in general and local economic conditions, such as:

•

employment levels;

•

availability of financing for homebuyers;

•

interest rates;

•

consumer confidence;

•

levels of new and existing homes for sale;

•

demographic trends; and

•

housing demand.

These may occur on a national scale, like the current downturn, or may affect some of the regions or markets in which we operate more than others. When adverse conditions affect any of our larger markets, they could have a proportionately greater impact on us than on some other homebuilding companies.

An oversupply of alternatives to new homes, including foreclosed homes, homes held for sale by investors and speculators, other existing homes, and rental properties, can also reduce our ability to sell new homes and depress new home prices and reduce our margins on the sales of new homes. High levels of foreclosures not only contribute to additional inventory available for sale, but also reduce appraisal valuations for new homes, potentially resulting in lower sales prices.

Continued military deployments in the Middle East and other overseas regions, terrorist attacks, other acts of violence or threats to national security, and any corresponding response by the United States or others, or related domestic or international instability, may adversely affect general economic conditions or cause a slowdown of the economy.

As a result of the foregoing matters, potential customers may be less willing or able to buy our homes. In the future, our pricing strategies may continue to be limited by market conditions. We may be unable to change the mix of our home offerings, reduce the costs of the homes we build or offer more affordable homes to maintain our margins or satisfactorily address changing market conditions in other ways. In addition, cancellations of home sales contracts in backlog may increase as homebuyers choose to not honor their contracts.

Our financial services business is closely related to our homebuilding business, as it originates mortgage loans principally to purchasers of the homes we build. A decrease in the demand for our homes because of the foregoing matters may also adversely affect the financial results of this segment of our business. An increase in the default rate on the mortgages we originate may adversely affect our ability to sell the mortgages or the pricing we receive upon the sale of mortgages or may increase our potential exposure regarding those mortgage loan sales. Because of the uncertainties inherent to these matters, actual future obligations could differ significantly from our currently estimated amounts.

Because of the seasonal nature of our business, our quarterly operating results can fluctuate.

We may experience noticeable seasonality and quarter-to-quarter variability in homebuilding activity levels. In general, the number of homes closed and associated home sales revenue can increase during the third and fourth quarters, compared with the first and second quarters. We believe that this type of seasonality reflects the historical tendency of homebuyers to purchase new homes in the spring with closings scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain markets. During 2010 and 2009, this seasonality pattern was not apparent in our financial or operating results. However, the extent to which our historical seasonality pattern contributed to actual 2010 and 2009 home sales and closing levels is unknown, and there can be no assurances that this seasonality pattern will be apparent in future reporting periods.

Supply shortages and other risks related to the demand for skilled labor and building materials could increase costs and delay deliveries.

The residential construction industry experiences labor and material shortages from time to time, including: work stoppages; labor disputes and shortages in qualified trades people, insulation, drywall, concrete, steel and lumber; lack of availability of adequate utility infrastructure and services; our need to rely on local subcontractors who may not be adequately capitalized or insured; and shortages, delays in availability, or fluctuations in prices, of building materials. These labor and material shortages can be more severe during periods of strong demand for housing or during periods in which the markets where we operate experience natural disasters that have a significant impact on existing residential and commercial structures. Additionally, we could experience labor shortages as a result of subcontractors going out of business during this recession. Any of these circumstances could give rise to delays in the start or completion of our residential communities, increase the cost of developing one or more of our residential communities and increase the construction cost of our homes. To the extent that market conditions prevent the recovery of increased costs, including, among other things, subcontracted labor, finished lots, building materials, and other resources, through higher selling prices, our Home Gross Margins and results of operations could be affected negatively.

Increased costs of lumber, framing, concrete, steel and other building materials could cause increases in construction costs and construction delays. We generally are unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts generally fix the price of the homes at the time the contracts are signed, which may be well in advance of the construction of the home. Sustained increases in

construction costs may, over time, erode our Home Gross Margins, particularly if pricing competition restricts our ability to pass on any additional costs of materials or labor, thereby decreasing our Home Gross Margins.

Natural disasters could cause an increase in home construction costs, as well as delays, and could negatively impact our results of operations.

The climates and geology of many of the markets in which we operate, including California and Florida, present increased risks of natural disasters. To the extent that hurricanes, severe storms, earthquakes, droughts, floods, heavy or prolonged precipitation, wildfires or other natural disasters or similar events occur, the financial and operating results of our business may be negatively impacted.

We are dependent on the services of key employees, and the loss of their services could hurt our business.

Our future success depends, in part, on our ability to attract, train and retain skilled personnel. If we are unable to retain our key employees or attract, train and retain other skilled personnel in the future, it could have an adverse impact on our financial and operating results.

The interests of certain controlling shareholders may be adverse to investors.

Larry A. Mizel, David D. Mandarich and other of our affiliates beneficially own, directly or indirectly, in the aggregate, approximately 25% of our common stock. To the extent they and their affiliates vote their shares in the same manner, their combined stock ownership may effectively give them the power to influence the election of members of our board of directors and other matters reserved for our shareholders. Circumstances may occur in which the interest of these shareholders could be in conflict with your interests. In addition, such persons may have an interest in pursuing transactions that, in their judgment, enhance the value of their equity investment in us, even though such transactions may involve risks to you.

Item 1B.

Unresolved Staff Comments.

None

Item 2.

Properties.

Our corporate office is located at 4350 South Monaco Street, Denver, Colorado 80237, where we lease office space in a 144,000 square foot office building. Our homebuilding divisions and, in some markets, other MDC subsidiaries, including HomeAmerican, American Home Insurance and American Home Title, lease additional office space. The table below outlines the number of office facilities that are leased and the approximate square footage leased in each market at December 31, 2010. We are satisfied with the suitability and capacity of our office locations.


	Number of Leased Facilities		Total Square Footage Leased
Arizona		3		34,000
California		4		49,000
Colorado		7		191,000
Florida		2		21,000
Maryland		4		25,000
Nevada		1		24,000
Utah		2		19,000
Virginia		3		25,000

Total		26		388,000

Item 3.

Legal Proceedings.

Because of the nature of the homebuilding business, we and certain of our subsidiaries and affiliates have been named as defendants in various claims, complaints and other legal actions arising in the ordinary course of business, including product liability claims and claims associated with the sale and financing of our homes. In the opinion of management, the outcome of these ordinary course matters will not have a material adverse effect upon our financial condition, results of operations or cash flows.

Additionally, litigation has been filed by homeowners in West Virginia against MDC, its subsidiary Richmond American Homes of West Virginia, Inc. (“RAH West Virginia”) and various subcontractors alleging a failure to install functional passive radon mitigation systems in their homes. The plaintiffs seek compensatory and punitive damages and medical monitoring costs for alleged negligent construction, failure to warn, breach of warranty or contract, breach of implied warranty of habitability, fraud, and intentional and negligent infliction of emotional distress based upon alleged exposure to radon gas. The litigation includes the following actions:

Joy, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-204, Circuit Court of Jefferson County, West Virginia (“Joy”). This action was filed on May 16, 2008, by sixty-six plaintiffs from sixteen households. The Company and RAH West Virginia have answered and asserted cross-claims against the subcontractors for contractual and implied indemnity and contribution.

Bauer, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-431, Circuit Court of Jefferson County, West Virginia (“Bauer”). This action was filed on October 24, 2008, by eighty-six plaintiffs from twenty-one households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

Saliba, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 08-C-447, Circuit Court, Jefferson County, West Virginia (“Saliba”). This action was filed on November 7, 2008, by thirty-five plaintiffs from nine households. This action has been consolidated for discovery and pre-trial proceedings with the Joy action.

By orders dated November 4 and 18, 2009, the trial court struck the answers filed by the Company and RAH West Virginia and entered judgment by default in favor of the plaintiffs on liability, with damages to be determined in a subsequent jury trial. On December 7, 2009, the Company and RAH West Virginia filed with the West Virginia Supreme Court of Appeals a motion seeking to stay the proceedings and a petition for writ of prohibition to vacate the default judgment. On June 16, 2010, the West Virginia Supreme Court of Appeals granted the Company and RAH West Virginia a writ of prohibition and vacated the trial court’s sanctions orders.

On July 29, 2010, the plaintiffs filed a renewed motion for sanctions based on substantially the same alleged misconduct. On January 14, 2011, the trial court again entered an order striking the answers filed by the Company and RAH West Virginia and imposing judgment by default upon them on the claims asserted in plaintiffs’ complaints (exclusive of the claim for punitive damages). As stated in the January 14, 2011 order, the cross-claims made by the Company and RAH West Virginia remain in effect.

Separately, additional claims have been filed by homeowners in West Virginia against the Company, RAH West Virginia and individual superintendants who had worked for RAH West Virginia. The new litigation consists of the following:

Thorin, et al. v. Richmond American Homes of West Virginia, Inc., et al., No. 10-C-154, Circuit Court of Jefferson County, West Virginia (“Thorin”). This litigation was filed on May 12, 2010, by forty plaintiffs from eleven households in Jefferson and Berkeley Counties. To date, this action has not been consolidated for any purposes with the prior three actions. The claims asserted and the relief sought in the Thorin case are substantially similar to the Joy, Bauer and Saliba cases.

MDC and RAH West Virginia believe that they have meritorious defenses to each of the lawsuits and intend to vigorously defend the actions.

We can give no assurance as to the final outcomes of these cases, or whether they would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 4.

[Removed and Reserved.]

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

At December 31, 2010, MDC had 689 shareowners of record. The shares of MDC common stock are traded on the New York Stock Exchange. The following table sets forth, for the periods indicated, the closing price ranges of MDC’s common stock.


	Three Months Ended
	March 31		June 30		September 30		December 31
2010
High	$	35.51	$	37.96	$	29.72	$	29.88
Low		30.04		26.33		25.69		24.63

2009
High	$	35.47	$	36.55	$	38.65	$	37.89
Low		23.38		28.59		27.19		28.50

The following table sets forth the cash dividends declared and paid in 2010 and 2009 (dollars in thousands, except per share amounts).


	Date of Declaration	Date of Payment	Dividend per Share		Total Dividends Paid
2010
First quarter	January 25, 2010	February 24, 2010	$	0.25	$	11,784
Second quarter	April 26, 2010	May 26, 2010		0.25		11,786
Third quarter	July 26, 2010	August 25, 2010		0.25		11,785
Fourth quarter	October 25, 2010	November 23, 2010		0.25		11,785

			$	1.00	$	47,140


2009
First quarter	January 26, 2009	February 25, 2009	$	0.25	$	11,595
Second quarter	April 27, 2009	May 27, 2009		0.25		11,842
Third quarter	July 20, 2009	August 19, 2009		0.25		11,743
Fourth quarter	October 26, 2009	November 24, 2009		0.25		11,745

			$	1.00	$	46,925

On January 24, 2011, MDC’s board of directors declared a quarterly cash dividend of twenty five cents ($0.25) per share. The dividend will be paid on February 23, 2011 to shareowners of record on February 9, 2011.

There were no shares of MDC common stock repurchased during the years ended December 31, 2010, 2009 or 2008. Consistent with recent years, at December 31, 2010, we were authorized to repurchase up to 4,000,000 shares of our common stock.

Performance Graph

Set forth below is a graph comparing the yearly change in the cumulative total return of MDC’s common stock with the cumulative total return of the Standard & Poor’s 500 Stock Index and with that of a peer group of other homebuilders over the five-year period ending on December 31, 2010.

It is assumed in the graph that $100 was invested (1) in the Company’s common stock; (2) in the stocks of the companies in the Standard & Poor’s 500 Stock Index; and (3) in the stocks of the peer group companies, just prior to the commencement of the period and that all dividends received within a quarter were reinvested in that quarter. The peer group index is composed of the following companies: Beazer Homes USA, Inc., D.R. Horton, Inc., Hovnanian

Enterprises, Inc., KB Home, Lennar Corporation, M/I Homes, Inc., Meritage Homes Corporation, NVR, Inc., Pulte Homes, Inc., The Ryland Group, Inc., Standard Pacific Corp. and Toll Brothers, Inc.

The stock price performance shown on the following graph is not indicative of future price performance.

COMPARISON OF CUMULATIVE TOTAL RETURN

OF MDC COMMON STOCK, THE S&P 500 STOCK INDEX

AND A SELECTED PEER GROUP

LOGO

Item 6.

Selected Financial Data.

The data in these tables and related footnotes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s Consolidated Financial Statements (in thousands, except per share and unit amounts).

SELECTED FINANCIAL DATA


	Year Ended December 31,
	2010			2009			2008			2007			2006
INCOME STATEMENT DATA
Home sales revenue	$	921,022		$	837,054		$	1,358,148		$	2,765,981		$	4,650,556
Total revenue		958,655			898,303			1,458,108			2,885,659			4,793,569
Home cost of sales		745,085			686,854			1,184,865			2,380,427			3,619,656
Asset impairments		21,647			30,986			298,155			726,621			112,027
General and administrative expenses		166,993			162,485			191,574			283,346			389,170
(Loss) income before income taxes ^{(1) (2)}		(70,601	)		(107,335	)		(382,135	)		(756,464	)		333,137
Net (loss) income ^{(3) (4)}		(64,770	)		24,679			(380,545	)		(636,940	)		214,253
Basic (loss) earnings per common share		(1.40	)		0.52			(8.25	)		(13.94	)		4.77
Diluted (loss) earnings per common share		(1.40	)		0.52			(8.25	)		(13.94	)		4.66

Dividends declared per share		1.00			1.00			1.00			1.00			1.00

(1)

Loss before income taxes for the years ended December 31, 2010, 2009 and 2008 includes the impact of recording to interest expense $38.2 million, $38.1 million and $18.0 million, respectively, of interest incurred on our senior notes that could not be capitalized due to our qualifying assets, i.e. inventory that is actively being developed, being significantly less than our senior note debt.

(2)	Loss before income taxes for the years ended December 31, 2010, 2009 and 2008 includes the impact of generating $26.6 million, $12.2 million and $35.8 million of interest income during the years ended December 31, 2010, 2009 and 2008, respectively.

(3)

Net income for the year ended December 31, 2009 includes the income tax benefit of being able to carry back $142.6 million of net operating losses due to the expanded NOL carryback provisions contained in the Worker, Homeownership, and Business Assistance Act of 2009, signed into law on November 6, 2009.

(4)	Net loss for the years ended December 31, 2008 and 2007 includes the impact of recording valuation allowances of $134.3 million and $160.0 million, respectively, against our deferred tax assets.


	December 31,
	2010			2009			2008			2007			2006
BALANCE SHEET DATA
Assets
Cash and cash equivalents	$	572,225		$	1,234,252		$	1,304,728		$	1,004,763		$	507,947
Marketable securities		968,729			327,944			54,864			—			—
Housing completed or under construction		372,422			260,324			415,500			902,221			1,178,671
Land and land under development		415,237			262,860			241,571			574,085			1,575,158
Total assets		2,547,769			2,429,308			2,474,938			3,012,764			3,909,875

Debt and Lines of Credit
Senior notes ⁽⁵⁾	$	1,242,815		$	997,991		$	997,527		$	997,091		$	996,682
Mortgage repurchase facility		25,434			29,115			34,873			—			—
Mortgage line of credit		—			—			—			70,147			130,467

Total debt and lines of credit	$	1,268,249		$	1,027,106		$	1,032,400		$	1,067,238		$	1,127,149

Stockholders’ Equity	$	983,683		$	1,073,146		$	1,080,920		$	1,476,013		$	2,161,882
Stockholders’ Equity per Outstanding Share	$	20.87		$	22.82		$	23.16		$	32.05		$	47.87

	Year Ended December 31,
	2010			2009			2008			2007			2006
OPERATING DATA
Homes closed (units)		3,245			3,013			4,488			8,195			13,123
Average selling price per home closed	$	283.8		$	277.8		$	302.6		$	337.5		$	354.4
Orders for homes, net (units)		3,261			3,306			3,074			6,504			10,229
Homes in Backlog at period end (units)		842			826			533			1,947			3,638
Estimated Backlog sales value at period end	$	269,000		$	265,000		$	173,000		$	650,000		$	1,300,000
Estimated average selling price of homes in Backlog	$	319.5		$	320.8		$	324.6		$	333.8		$	357.3
Active subdivisions at year-end		148			133			191			278			306

Cash Flows From
Operating activities	$	(209,081	)	$	202,454		$	479,511		$	592,583		$	363,048
Investing activities ⁽⁶⁾	$	(644,466	)	$	(224,992	)	$	(113,439	)	$	(1,447	)	$	(10,221	)
Financing activities ⁽⁷⁾	$	191,520		$	(47,938	)	$	(66,107	)	$	(94,320	)	$	(59,411	)

(5)	In January 2010, we completed a public offering of $250 million principal amount of senior notes due February 2020 for which we received proceeds of $242.3 million, net of discount and issuance costs.

(6)

Investing activities during the years ended December 31, 2010, 2009 and 2008 include the purchase of $638.0 million, $273.1 million and $54.9 million in marketable securities, net of sales and maturities. During the years ended December 31, 2009 and 2008, investing activities included the receipt of $56.0 million and use of $57.1 million, respectively, associated with The Reserve Primary Fund and The Reserve U.S. Government Fund.

(7)	Cash provided by financing activities during the year ended December 31, 2010 primarily resulted from $242.3 million raised through our issuance of senior notes in January 2010, partially offset by $47.1 million in cash dividends.

Seasonality and Variability in Quarterly Results

The following table reflects our unaudited summarized quarterly consolidated financial and operational information for each of the twelve months ended December 31, 2010 and 2009 (in thousands, except per share and unit amounts). See “Forward-Looking Statements” above.


	Quarter
	Fourth			Third			Second			First
2010
Home sales revenue	$	252,302		$	216,501		$	311,276		$	140,943
Total revenue		259,566			225,681			326,330			147,078
Asset impairments		17,929			3,718			—			—
General and administrative expenses		42,933			39,269			44,588			40,203
Loss before income taxes		(35,066	)		(10,594	)		(3,699	)		(21,242	)
Net loss		(29,974	)		(10,239	)		(3,684	)		(20,873	)
Orders for homes, net (units)		519			796			1,015			931
Homes closed (units)		865			722			1,135			523
Home Gross Margins		17.0	%		20.9	%		18.1	%		22.4	%
Homes in Backlog at period end (units)		842			1,188			1,114			1,234
Estimated Backlog sales value at period end	$	269,000		$	368,000		$	351,000		$	381,000
Loss per share
Basic	$	(0.65	)	$	(0.22	)	$	(0.08	)	$	(0.45	)
Diluted	$	(0.65	)	$	(0.22	)	$	(0.08	)	$	(0.45	)

2009
Home sales revenue	$	297,702		$	186,816		$	185,554		$	166,982
Total revenue		323,879			203,226			195,266			175,932
Asset impairments		13,977			1,197			1,243			14,569
General and administrative expenses		40,504			45,800			37,800			38,381
Loss before income taxes		(15,381	)		(31,818	)		(19,063	)		(41,073	)
Net income (loss) ⁽⁸⁾		127,162			(32,048	)		(29,582	)		(40,853	)
Orders for homes, net (units)		637			1,016			977			676
Homes closed (units)		1,109			659			665			580
Home Gross Margins		18.8	%		18.9	%		18.0	%		15.4	%
Homes in Backlog at period end (units)		826			1,298			941			629
Estimated Backlog sales value at period end	$	265,000		$	383,000		$	295,000		$	196,000
Earnings (loss) per share
Basic	$	2.71		$	(0.69	)	$	(0.64	)	$	(0.88	)
Diluted	$	2.68		$	(0.69	)	$	(0.64	)	$	(0.88	)

(8)

Net income for the quarter ended December 31, 2009 includes the income tax benefit of being able to carry back $142.6 million of net operating losses due to the expanded NOL carryback provisions contained in the Worker, Homeownership, and Business Assistance Act of 2009, signed into law on November 6, 2009.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in “Item 1A, Risk Factors.”

EXECUTIVE SUMMARY

Despite new homes becoming more affordable and low interest rates, economic conditions continued to delay a recovery in the new home sales market. During 2010 we continued to be faced with challenges, which included: (1) significant deterioration in new orders for homes following the expiration of the federal homebuyer tax credit, which required the sale of homes to be completed by April 30, 2010; (2) high levels of home inventories; (3) significant competition for new home orders and acquisition of finished lots; and (4) overall low economic activity, low consumer confidence and high unemployment levels. In addition, our industry faces uncertainty surrounding the impact that new legislation and regulations may have on our business. The timing, strength and sustainability of any recovery in the new home sales market remains unclear. We believe that stability in the credit and capital markets, improvement in U.S. employment levels, declines in home foreclosure levels and an eventual renewal of confidence in the U.S. and global economies will play a major role in any turnaround in the homebuilding and mortgage lending industries. See “Forward-Looking Statements” above.

During 2010, the extension of the federal homebuyer tax credit coupled with our sales programs, including the offering of low mortgage interest rates, helped us experience only a 1% decline in net orders for homes during the year ended December 31, 2010 compared with the year ended December 31, 2009. However, our sales order pace slowed during the last six months of 2010 compared with the same six month period in 2009. We had 1,946 net orders for homes during the first six months of 2010 compared with 1,315 homes during the last six months of 2010, representing a 32% decline in orders for homes. This compares to having 1,653 net orders for homes in both the first and last six months of 2009.

Although our Home Gross Margins (as defined below) improved slightly year over year, our fourth quarter Home Gross Margins declined by 390 basis points sequentially from the 2010 third quarter. This decline reflects a reduction in prices, especially on our older inventory, in order to generate traffic and sales velocity. In certain communities, primarily within our West segment, we are experiencing strong pricing competition in markets that were previously faced with high levels of competition. This pressure, coupled with the limited number of qualified buyers in this market, resulted in asset impairments of $18.0 million during the year ended December 31, 2010 for our West segment. In total, we impaired $21.6 million of assets during the year ended December 31, 2010, representing 1,178 lots in 46 subdivisions. This compares to total asset impairments of $31.0 million, or 1,169 lots in 61 subdivisions, for the year ended December 31, 2009. Our loss before income taxes of $70.6 million during the year ended December 31, 2010 improved from the $107.3 million loss we had during the year ended December 31, 2009. This improvement includes a $9.3 million decrease in asset impairments, a $14.4 million increase in interest income, a 120 basis point increase in Home Gross Margins and the impact of closing 232 more homes during 2010, compared with 2009. These items were partially offset by a $12.7 million combined increase in sales and marketing, commission and general and administrative expenses during the year ended December 31, 2010, compared with the year ended December 31, 2009.

During the year ended December 31, 2010, we received $143.1 million of our income tax receivable and completed the issuance of senior notes that generated $242.3 million in cash. Additionally, we invested $638.0 million, net, of cash into various debt and equity securities during the year ended December 31, 2010. Although acquisition of finished lots continued to be highly competitive during the 2010 year, we were able to increase the total number of lots controlled through acquisition and lot option contracts by 3,227, representing a 36% increase.

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting policies generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and

liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Management evaluates such estimates and judgments on an on-going basis and makes adjustments as deemed necessary. Actual results could differ from these estimates using different estimates and assumptions, or if conditions are significantly different in the future. See “Forward-Looking Statements” above.

Listed below are those estimates and policies that we believe are critical and require the use of complex judgment in their application. Our critical accounting estimates and policies are as follows and should be read in conjunction with the Notes to our Consolidated Financial Statements.

Homebuilding Inventory Valuation. Our homebuilding inventories include assets associated with subdivisions in which we intend to construct and sell homes on the land and assets associated with model and speculative homes. 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 Profit” (which is defined as home sales revenue less home cost of sales and all direct incremental costs associated with the home closing) for closed homes;

•

estimated future undiscounted cash flows and Operating Profit;

•

forecasted Operating Profit for homes in Backlog;

•

actual and trending net and gross home orders;

•

base sales price and home sales incentive information for closed and sold homes, homes in Backlog and homes forecasted to close over the remaining life of the subdivision;

•

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

•

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

On a quarterly basis, if events or circumstances indicate that the carrying value of our inventory may not be recoverable, such assets are reviewed for impairment by comparing the undiscounted estimated future cash flows from an individual subdivision to its carrying value. The evaluation for the recoverability of the carrying value of the assets for each individual subdivision can be impacted significantly by the following:

•

estimates of future base selling prices;

•

estimates of future home sales incentives; and

•

estimates of future home construction and land development costs.

These estimates are dependent on specific market or sub-market conditions for each subdivision. While we consider available information to determine what we believe to be our best estimates as of the end of a reporting period, these estimates are subject to change in future reporting periods as facts and circumstances change. Local market-specific conditions that may impact these estimates for a subdivision include:

•

historical subdivision results, and actual and trending Operating Profit, base selling prices and home sales incentives;

•

forecasted Operating Profit for homes in Backlog;

•

the intensity of competition within a market or sub-market, including publicly available home sales prices and home sales incentives offered by our competitors;

•

increased levels of home foreclosures;

•

the current sales pace for active subdivisions;

•

subdivision specific attributes, such as location, availability of lots in the sub-market, desirability and uniqueness of subdivision location and the size and style of homes currently being offered;

•

potential for alternative home styles to respond to local market conditions;

•

changes by management in the sales strategy of a given subdivision; and

•

current local market economic and demographic conditions and related trends and forecasts.

These and other local market-specific conditions that may be present are considered by personnel in our homebuilding divisions as they prepare or update the forecasted assumptions for each subdivision. Quantitative and qualitative factors other than home sales prices could significantly impact the potential for future impairments. The sales objectives can differ among subdivisions, even within a given sub-market. For example, facts and circumstances in a given subdivision may lead us to price our homes with the objective of yielding a higher sales absorption pace, while facts and circumstances in another subdivision may lead us to price our homes to minimize deterioration in our Home Gross Margins, even though this could result in a slower sales absorption pace. Furthermore, the key assumptions included in our estimated future undiscounted cash flows may be interrelated. For example, a decrease in estimated base sales price or an increase in home sales incentives may result in a corresponding increase in sales absorption pace. Additionally, a decrease in the average sales price of homes to be sold and closed in future reporting periods for one subdivision that has not been generating what management believes to be an adequate sales absorption pace may impact the estimated cash flow assumptions of a nearby subdivision. Changes in our key assumptions, including estimated construction and land development costs, absorption pace and selling strategies could materially impact future cash flow and fair value estimates. Due to the number of possible scenarios that would result from various changes in these factors, we do not believe it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.

If the undiscounted future cash flows of a subdivision are less than its carrying value, the carrying value of the subdivision is written down to its then estimated fair value.

Management 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. The estimated future cash flows are the same for both our recoverability and fair value assessments. Factors we consider when determining the discount rate to be used for each subdivision include, among others:

•

the number of lots in a given subdivision;

•

the amount of future land development costs to be incurred;

•

risks associated with the home construction process, including the stage of completion for the entire subdivision and the number of owned lots under construction; and

•

the estimated remaining lifespan of the subdivision.

During the years ended December 31, 2010, 2009 and 2008, discount rates used in our estimated discounted cash flow assessments generally ranged from 13% to 18%. We recorded $15.9 million, $21.0 million and $174.5 million of impairments to our land and land under development during the years ended December 31, 2010, 2009 and 2008, respectively, and $5.3 million, $8.4 million and $82.6 million of impairments to our housing completed or under construction during the years ended December 31, 2010, 2009 and 2008, respectively. We allocate the impairments recorded between housing completed or under construction and land and land under development for each impaired subdivision based upon the status of construction of a home on each lot (i.e. if the lot is in housing completed or under construction, the impairment for that lot is recorded against housing completed or under construction). The allocation of impairment is the same with respect to each lot in a given subdivision. These impairments, together with impairments of our held-for-sale inventory and prepaid expenses and other assets, are presented as a separate line item in the Consolidated Statements of Operations. Changes in management’s estimates, particularly the timing and amount of the estimated future cash inflows and outflows and forecasted average selling prices of homes to be sold and closed can materially affect any impairment calculation. Because our forecasted cash flows are impacted significantly by changes in market conditions, it is reasonably possible that actual results could differ significantly from those estimates.

Warranty Reserves. Our homes are sold with limited third-party warranties. We record expenses and warranty reserves for general and structural warranty claims, as well as reserves for known, unusual warranty-related expenditures. Warranty reserves are established based upon historical experience as homes close on a house-by-house basis in an amount estimated to be adequate to cover expected costs of materials and outside labor during warranty periods. The establishment of warranty reserves for closed homes and the quarterly evaluation of our warranty reserve balance are primarily based on an actuarial study that includes known facts and interpretations of circumstances, including, among other things, our trends in historical warranty payment levels and warranty payments for claims not considered to be normal and recurring.

Warranty payments incurred for an individual house may differ from the related reserve established for the home at the time it was closed. The actual disbursements for warranty claims are evaluated in the aggregate to determine if an

adjustment to the historical warranty reserve should be recorded. During 2010, in light of a continued decrease in our warranty payments, and similar to our procedure in prior years, we engaged a third-party actuary to assist in our analysis of estimated future warranty payments. Based upon the actuarial analysis, we refined our methodology for estimating a reasonable range of warranty reserves during 2010. Also during 2010, we expanded our analysis and included all structural warranty claims experience in the actuarial analysis. We believe the refined methodology results in a better estimate of warranty cost exposure, especially in periods of declining payment activity, and provides better visibility to the sensitivity of the estimate in the current environment. We will continue to periodically engage a third-party actuary for purposes of assisting in evaluating and determining the reasonableness of our general and structural warranty reserves. Additionally, and consistent with prior periods, certain known, unusual warranty claims continue to be evaluated and reserved for on an individual case by case basis.

Warranty reserves are included in accrued liabilities in the Consolidated Balance Sheet and adjustments to our warranty reserves are recorded as an increase or reduction to home cost of sales in the Consolidated Statement of Operations. A 1% change in our estimated ultimate warranty losses for homes that closed over the last ten years would result in an adjustment to our warranty reserve balance of approximately $2.0 million. Additionally, it is possible that changes in the warranty payment experience used in estimating our ultimate warranty losses could have a material impact on our warranty reserve balances. See “Forward-Looking Statements” above.

Insurance Reserves. We record expenses and liabilities for losses and loss adjustment expenses for claims associated with: (1) insurance policies issued by StarAmerican and Allegiant; (2) self-insurance; and (3) deductible amounts under our insurance policies. The establishment of the provisions for outstanding losses and loss adjustment expenses is based on actuarial studies that include known facts and interpretation of circumstances, including our experience with similar cases and historical trends involving claim payment patterns, pending levels of unpaid claims, product mix or concentration, claim severity, frequency patterns (such as those caused by natural disasters), fires or accidents, depending on the business conducted and changing regulatory and legal environments. The process of determining our insurance reserve balances necessarily requires estimates associated with various assumptions, each of which can positively or negatively impact our insurance reserve balances. A 1% change in our estimated ultimate insurance losses for homes that closed over the last ten years would result in an adjustment to our insurance reserve balance of approximately $1.0 million. Additionally, it is possible that changes in the claim rate or the average cost per claim used to estimate the self-insured reserves could have a material impact on our insurance reserve balances.

Litigation Accruals. In the normal course of business, we are a defendant in claims primarily relating to construction defects, product liability and personal injury claims. These claims seek relief from us under various theories, including breach of implied and express warranty, negligence, strict liability, misrepresentation and violation of consumer protection statutes. We have accrued for losses that may be incurred with respect to legal claims based upon information provided by our legal counsel, including counsel’s on-going evaluation of the merits of the claims and defenses. Due to uncertainties in the estimation process, actual results could vary from those accruals and could have a material impact on our results of operations. At December 31, 2010 and 2009, we had legal accruals of $14.2 million and $14.5 million, respectively. We continue to evaluate litigation accruals and, based on historical results, believe that our existing estimation process is accurate and do not anticipate the process to change materially in the future. Additionally, because our litigation accruals can be impacted by a significant number of factors, we do not believe it is possible to develop a sensitivity analysis with a level of precision that would be meaningful to an investor.

Income Taxes—Valuation Allowance. A valuation allowance is recorded against a deferred tax asset if, based on the weight of available evidence, it is more-likely-than-not (a likelihood of more than 50%) that some portion, or all, of the deferred tax asset will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law (generally 2 and 20 years, respectively). The four sources of taxable income to be considered in determining whether a valuation allowance is required include:

•

future reversals of existing taxable temporary differences;

•

taxable income in prior carryback years;

•

tax planning strategies; and

•

future taxable income exclusive of reversing temporary differences and carryforwards.

Determining whether a valuation allowance for deferred tax assets is necessary requires an analysis of both positive and negative evidence regarding realization of the deferred tax assets. Examples of positive evidence may include:

•

a strong earnings history exclusive of the loss that created the deductible temporary differences, coupled with evidence indicating that the loss is the result of an aberration rather than a continuing condition;

•

an excess of appreciated asset value over the tax basis of a company’s net assets in an amount sufficient to realize the deferred tax asset; and

•

existing Backlog that will produce sufficient taxable income to realize the deferred tax asset based on existing sales prices and cost structures.

Examples of negative evidence may include:

•

the existence of “cumulative losses” (defined as a pre-tax cumulative loss for the current and previous two years);

•

an expectation of being in a cumulative loss position in a future reporting period;

•

a carryback or carryforward period that is so brief that it would limit the realization of tax benefits;

•

a history of operating loss or tax credit carryforwards expiring unused; and

•

unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis.

The weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. A company must use judgment in considering the relative impact of positive and negative evidence. At December 31, 2010 and 2009, we had a full valuation allowance of $231.4 million and $208.1 million, respectively, recorded against our net deferred tax asset, primarily due to our experiencing a three-year cumulative operating loss as of December 31, 2010 and 2009. Future adjustments to our deferred tax asset valuation allowance will be determined based upon changes in the expected realization of our net deferred tax assets.

In the future, changes in our valuation allowance may result from, among other things, additional pre-tax operating losses resulting in increases in our valuation allowance or pre-tax operating income resulting in decreases in our valuation allowance.

Liability for Unrecognized Tax Benefits. Accounting literature for liability for unrecognized tax benefits provides guidance for the recognition and measurement in financial statements for uncertain tax positions taken or expected to be taken in a tax return.

The evaluation of a tax position is a two-step process, the first step being recognition. We determine whether it is more-likely-than-not that a tax position will be sustained upon tax examination, including resolution of any related appeals or litigation, based on the technical merits of the position. The technical merits of a tax position derive from both statutory and judicial authority (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements.

The second step is measurement. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate resolution with a taxing authority. At December 31, 2010 and 2009, our liability for unrecognized tax benefits was $55.9 million and $60.2 million, respectively.

Revenue Recognition. In the process of selling homes, we negotiate the terms of a home sales contract with a prospective homebuyer, including base sales price, any options and upgrades (such as upgraded appliance, cabinetry, flooring, etc.), and any home sales incentives. Our home sales incentives generally come in the form of: (1) discounts on the sales price of the home (“Sales Price Incentives”); (2) homebuyer closing cost assistance paid by Richmond American Homes to a third-party (“Closing Cost Incentives”); (3) mortgage loan origination fees paid by Richmond American Homes to HomeAmerican (“Mortgage Loan Origination Fees”); and (4) interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of home sales incentives offered to prospective

homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing. Revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives or Mortgage Loan Origination Fees.

We recognize revenue from home closings and land sales when: (1) the closing has occurred; (2) title has passed to the buyer; (3) possession and other attributes of ownership have been transferred to the buyer; (4) we are not obligated to perform significant additional activities after closing and delivery; and (5) the buyer demonstrates a commitment to pay for the property through an adequate initial and continuing investment. The buyer’s initial investment shall include: (1) cash paid as a down payment; (2) the buyer’s notes supported by irrevocable letters of credit; (3) payments made by the buyer to third-parties to reduce existing indebtedness on the property; and (4) other amounts paid by the buyer that are part of the sales value of the property.

Our mortgage loans generally are sold to third-party purchasers with anti-fraud, warranty and limited early payment default provisions. Accordingly, a sale of a homebuyer mortgage loan has occurred when the following criteria have been met: (1) the payment from the third-party purchaser is not subject to future subordination; (2) we have transferred all the usual risks and rewards of ownership that is in substance a sale; and (3) we do not have a substantial continuing involvement with the mortgage loan. Factors that we consider in assessing whether a sale of a mortgage loan has occurred include, among other things: (1) the recourse, if any, to HomeAmerican for credit and interest rate risk; (2) the right or obligation, if any, of HomeAmerican to repurchase the loan; and (3) the control HomeAmerican retains, or is perceived to retain, over the administration of the loan post-closing.

Revenue from the sale of mortgage loan servicing is recognized upon the exchange of consideration for the mortgage loans and related servicing rights between the Company and the third-party.

We measure mortgage loans held-for-sale at fair value. Using fair value allows an offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Home Cost of Sales. Home cost of sales includes the specific construction costs of each home and all applicable land acquisition, land development and related costs, both incurred and estimated to be incurred, warranty costs and finance and closing costs, including Closing Cost Incentives. We use the specific identification method for the purpose of accumulating home construction costs and allocate costs to each lot within a subdivision associated with land acquisition and land development based upon relative market value of the lots prior to home construction. Lots within a subdivision typically have comparable market values, and, as such, we generally allocate costs equally to each lot within a subdivision. We record all home cost of sales when a home is closed on a house-by-house basis.

When a home is closed, we generally have not yet paid or incurred all costs necessary to complete the construction of the home and certain land development costs. At the time of a home closing, we compare the home construction budgets to actual recorded costs to determine the additional estimated costs remaining to be paid on each closed home. For amounts not incurred or paid as of the time of closing a home, we record an estimated accrual associated with certain home construction and land development costs. Generally, these accruals are established based upon contracted work that has yet to be paid, open work orders not paid at the time of home closing, punch list items identified during the course of the homebuyer’s final walkthrough of the home, as well as land completion costs more likely than not to be incurred, and represent estimates believed to be adequate to cover the expected remaining home construction and land development costs. We monitor the adequacy of these accruals on a house-by-house basis and in the aggregate on both a market-by-market and consolidated basis. At December 31, 2010 and 2009, we had $12.5 million and $21.2 million, respectively, of land development and home construction accruals for closed homes. Actual results could differ from such estimates.

We may offer to pay all or a portion of a homebuyer’s closing costs as an incentive. Closing Cost Incentives represent expenses that, over and above the price of the home, the Company and the homebuyer normally incur to complete the recording of the sales transaction. These costs may include items payable to third-parties such as mortgage loan origination fees, discount points, appraisal fees, document preparation fees, insurance premiums, title search and insurance fees, as well as government recording and transfer charges. We record Closing Cost Incentives at the time a home is closed and present them as a component of home cost of sales in the Consolidated Statements of Operations.

Mortgage Loan Loss Reserves. In the normal course of business, we establish reserves for potential losses associated with HomeAmerican’s sale of mortgage loans to third-parties. These reserves are created to address repurchase and indemnity claims by third-party purchasers of the mortgage loans, which claims arise primarily out of allegations of homebuyer fraud at the time of origination of the loan. These reserves are based upon, among other matters: (1) pending claims received from third-party purchasers associated with previously sold mortgage loans; (2) a current assessment of the potential exposure associated with future claims of homebuyer fraud in mortgage loans originated in prior periods; and (3) historical loss experience. Significant changes in the number and magnitude of claims to repurchase previously sold mortgage loans could have a material impact on our results of operations. Our mortgage loan reserves are reflected as a component of accrued liabilities in the Consolidated Balance Sheets, and the associated expenses are included as a component of general and administrative expenses in the Consolidated Statements of Operations. At December 31, 2010 and 2009, we had mortgage loan loss reserves of $6.9 million and $9.6 million, respectively.

Stock-Based Compensation. Accounting for share-based payment awards, generally grants of stock options and restricted stock can require significant judgment in estimating the fair value of the share-based payment awards and related compensation. Stock-based compensation expense was $17.5 million, $15.1 million and $14.6 million for the years ended December 31, 2010, 2009 and 2008, respectively, and was recorded to general and administrative expenses in the Consolidated Statements of Operations.

Determining the appropriate fair value model and calculating the fair value of stock option awards requires judgment, including estimating stock price volatility, annual forfeiture rates and the expected life of an award. We estimated the fair value for stock options granted during the twelve months ended December 31, 2010, 2009 and 2008 using the Black-Scholes option pricing model. The Black-Scholes option pricing model calculates the estimated fair value of stock options based upon the following inputs: (1) closing price of the Company’s common stock on the measurement date (generally the date of grant); (2) exercise price; (3) expected stock option life; (4) expected volatility; (5) risk-free interest rate; and (6) expected dividend yield rate. The expected life of employee stock options represents the period for which the stock options are expected to remain outstanding and is derived primarily from historical exercise patterns. The expected volatility is based on the historical volatility in the price of our common stock over the most recent period commensurate with the estimated expected life of our employee stock options, adjusted for the impact of unusual fluctuations not reasonably expected to recur and other relevant factors. The risk-free interest rate assumption is determined based upon observed interest rates appropriate for the expected term of our employee stock options. The expected dividend yield assumption is based on our historical dividend payouts. We determine the estimated fair value of the stock option awards on the date they were granted. The fair values of previously granted stock option awards are not adjusted as subsequent changes in the foregoing assumptions occur; for example, an increase or decrease in the price of the Company’s common stock. However, changes in the foregoing inputs, particularly the price of the Company’s common stock, expected stock option life and expected volatility, significantly change the estimated fair value of future grants of stock options.

An annual forfeiture rate is estimated at the time of grant, and revised if necessary, in subsequent periods if the actual forfeiture rate differs from our estimate. We estimate the annual forfeiture rate generally to be 10% to 25% for share-based payment awards granted to Non-Executives (as defined in Note 14 to our Consolidated Financial Statements) and generally 0% for share-based payment awards granted to our Executives (as defined in Note 14 to our Consolidated Financial Statements and currently consisting of our Chief Executive Officer, Chief Operating Officer and General Counsel) and Directors (as defined in Note 14 to our Consolidated Financial Statements), based on the terms of their awards, as well as historical forfeiture experience. However, during the 2010 fourth quarter, upon the departure of our Chief Financial Officer, we updated our estimated forfeiture rate applicable to stock option grants to him as all such previous grants were unvested as of the time of his departure.

Segment Reporting. The application of segment reporting requires significant judgment in determining our operating segments. Operating segments are defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the chief operating decision-maker, or decision-making group, to evaluate performance and make operating decisions. We have identified our chief operating decision-makers as two key executives—the Chief Executive Officer and Chief Operating Officer.

We have identified each homebuilding subdivision as an operating segment as each homebuilding subdivision engages in business activities from which it earns revenue, primarily from the sale of single-family detached homes,

generally to first-time and first-time move-up homebuyers. Subdivisions in the reportable segments noted below have been aggregated because they are similar in the following regards: (1) economic characteristics; (2) housing products; (3) class of homebuyer; (4) regulatory environments; and (5) methods used to manage the construction and sale of homes. In making the determination of whether or not our markets demonstrate similar economic characteristics, we review, among other things, actual and trending Home Gross Margins (as defined below) for homes closed within each market and forecasted Home Gross Margins. Accordingly, we may be required to reclassify our reportable segments if markets that currently are being aggregated do not continue to demonstrate similar economic characteristics.

Our homebuilding reportable segments are as follows:

•

West (Arizona, California and Nevada);

•

Mountain (Colorado and Utah);

•

East (Maryland and Virginia); and

•

Other Homebuilding (Florida and Illinois)

Land Option Contracts. In the normal course of business, we enter into lot option purchase contracts, generally through a deposit of cash or letter of credit, for the right to purchase land or lots at a future point in time with predetermined terms. Option deposits and pre-acquisition costs we incur related to our lot option purchase contracts are capitalized if all of the of the following conditions have been met: (1) the costs are directly identifiable with the specific property; (2) the costs would be capitalized if the property were already acquired; and (3) acquisition of the property is probable, meaning we are actively seeking and have the ability to acquire the property and there is no indication that the property is not available for sale. We also consider the following when determining if the acquisition of the property is probable: (1) changes in market conditions subsequent to contracting for the purchase of the land; (2) current contract terms, including per lot price and required purchase dates; and (3) our current land position in the given market or sub-market. Option deposits and capitalized pre-acquisition costs are expensed to other operating expense in the Consolidated Statements of Operations when we believe it is no longer probable that we will acquire the lots under option. We expensed $3.1 million, $2.9 million and $6.8 million during the years ended December 31, 2010, 2009 and 2008, respectively, related to the write-off of option deposits and capitalized pre-acquisition costs. At December 31, 2010, we had the right to acquire 4,159 lots under option contracts, with $9.0 million in cash and $4.5 million of letters of credit option deposits at risk.

Our obligation with respect to option contracts generally is limited to forfeiture of the related cash deposits and/or letters of credit. Certain of these contracts could create a variable interest, with the land seller being the variable interest entity (“VIE”) and, as such, could require us to consolidate the assets and liabilities of the VIE if we are determined to be the primary beneficiary. We have evaluated all lot option purchase contracts at December 31, 2010 and considered: (1) what investments were at risk; (2) contractual obligations to perform; (3) expected changes in market prices of land over a given period; and (4) annual risk free interest rates. Based on these evaluations, we determined that our interests in these VIEs did not result in significant variable interests or require us to consolidate the VIEs. Due to the nature of the assumptions used in our evaluation process, it is possible that our evaluation of lot option contracts that we may execute in the future could result in our being identified as the primary beneficiary, which could result in our consolidation of a VIE. In determining whether we are the primary beneficiary, we consider, among other things, whether we have the power to direct the VIE’s activities that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. We also consider whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE. We have determined that, as of December 31, 2010, we are not the primary beneficiary of any VIEs from which we are purchasing land under land option contracts.

THE FOLLOWING DISCUSSION COMPARES RESULTS FOR THE YEAR ENDED

DECEMBER 31, 2010 WITH THE YEAR ENDED DECEMBER 31, 2009.

Results of Operations

Home Sales Revenue. Home sales revenue from a home closing includes the base sales price and any purchased options and upgrades and is reduced for any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican) and interest rate buydowns by HomeAmerican in mortgage loan financing offered to our homebuyers. The combination of base sales price and any purchased options and upgrades, less any of the foregoing incentives, for each closed home constitutes the selling price of our closed homes.

Our homes sales revenue can be impacted by changes in our home closing levels and changes in the average selling prices of closed homes. The combination of home sales incentives offered to prospective homebuyers may vary from subdivision-to-subdivision and from home-to-home, and may be revised during the home closing process based upon homebuyer preferences or upon changes in market conditions, such as changes in our competitors’ pricing.

The table below summarizes home sales revenue by reportable segment (dollars in thousands).


	Year Ended December 31,						Increase (Decrease)
	2010			2009			Amount			%
Homebuilding
West	$	327,688		$	378,328		$	(50,640	)		-13	%
Mountain		352,001			244,862			107,139			44	%
East		212,320			176,072			36,248			21	%
Other Homebuilding		44,801			52,783			(7,982	)		-15	%

Total Homebuilding		936,810			852,045			84,765			10	%
Intercompany adjustments		(15,788	)		(14,991	)		(797	)		-5	%

Total	$	921,022		$	837,054		$	83,968			10	%

The decrease in home sales revenue in our West segment was due to closing 179 fewer homes during the year ended December 31, 2010, which resulted in a decrease of $42.5 million and declines of $40,200 and $10,800 in the average selling prices of closed homes in our California and Nevada markets of this segment, respectively. The increase in home sales revenue in our Mountain segment was due to closing 377 more homes during the year ended December 31, 2010, which resulted in an increase of $116.1 million. This improvement was partially offset by declines of $14,800 and $2,600 in the average selling price of closed homes in the Utah and Colorado market, respectively.

In our East segment, home sales revenue increased due to closing 77 more homes during the year ended December 31, 2010. In our Other Homebuilding segment, home sales revenue decreased $9.6 million due to closing 43 fewer homes, partially offset by a $17,600 increase in the average selling price of closed homes in the Florida market of this segment.

Home Gross Margins. We define “Home Gross Margins” to mean home sales revenue less home cost of sales as a percent of home sales revenue.

The following table sets forth our Home Gross Margins by reportable segment.


	Year Ended December 31,
	2010			2009			Increase
Homebuilding
West		27.3	%		23.5	%		3.8	%
Mountain		12.5	%		11.8	%		0.7	%
East		16.2	%		14.8	%		1.4	%
Other Homebuilding		18.2	%		12.0	%		6.2	%

Consolidated		19.1	%		17.9	%		1.2	%

Home Gross Margins can be impacted positively or negatively in a reporting period by adjustments to our warranty reserves. During the year ended December 31, 2010, and consistent with the years ended December 31, 2008 and 2009, we continued to experience lower warranty payments on previously closed homes. As a result of favorable warranty payment experience relative to our estimates at the time of home closing, we recorded adjustments to reduce our warranty reserve of $20.8 million and $27.8 million during the years ended December 31, 2010 and 2009, respectively.

Home Gross Margins are also impacted by interest included in home cost of sales. During the years ended December 31, 2010 and 2009, interest in home cost of sales was 2.6% and 3.7% percent of home sales revenue, respectively.

The following table sets forth our Home Gross Margins excluding warranty adjustments and interest in home cost of sales during the years ended December 31, 2010 and 2009.


	Year Ended December 31,
	2010			2009			Increase
West		22.9	%		20.5	%		2.4	%
Mountain		16.3	%		15.6	%		0.7	%
East		17.8	%		16.8	%		1.0	%
Other		19.2	%		14.5	%		4.7	%

Consolidated		19.4	%		18.3	%		1.1	%

During the year ended December 31, 2010, Home Gross Margins, excluding warranty adjustments and interest expense, for each of our homebuilding segments were generally favorably impacted by decreases in home cost of construction, as we have been closing more of our smaller and redesigned homes, partially offset by increases in the lot cost per closed home.

Future Home Gross Margins may be impacted negatively by, among other things: (1) a weaker economic environment as well as homebuyers’ reluctance to purchase new homes based on concerns about employment conditions; (2) continued and/or increases in home foreclosure levels; (3) on-going tightening of mortgage loan origination requirements; (4) increased competition and increases in the level of home order cancellations, which could affect our ability to maintain existing home prices and/or home sales incentive levels; (5) deterioration in the demand for new homes in our markets; (6) fluctuating energy costs, including oil and gasoline; (7) increases in the costs of subcontracted labor, finished lots, building materials, and other resources, to the extent that market conditions prevent the recovery of increased costs through higher selling prices; (8) increases in interest expense included in home cost of sales; (9) increases in the costs of finished lots; (10) changes in our warranty payment experiences and/or increases in warranty expenses or litigation expenses associated with construction defect claims; and (11) other general risk factors. See “Forward-Looking Statements” above.

The following table sets forth by reportable segment a reconciliation of our home cost of sales, as reported, to home cost of sales excluding warranty adjustments and interest in home cost of sales, which is used in the calculation of Home Gross Margins, excluding warranty adjustments and interest in home cost of sales (dollars in thousands).


	Home Sales Revenue - As reported			Home Cost of Sales - As reported			Warranty Adjustments			Interest in Cost of Sales		Home Cost of Sales - Excluding Warranty Adjustments and Interest			Home Gross Margins - Excluding Warranty Adjustments and Interest⁽¹⁾
Twelve Months Ended December 31, 2010
West	$	327,688		$	238,175		$	(23,403	)	$	8,795	$	252,783			22.9	%
Mountain		352,001			308,023			4,989			8,570		294,464			16.3	%
East		212,320			178,014			(2,092	)		5,626		174,480			17.8	%
Other		44,801			36,661			(339	)		821		36,179			19.2	%
Intercompany adjustments		(15,788	)		(15,788	)		—			—		(15,788	)		N/A

Consolidated	$	921,022		$	745,085		$	(20,845	)	$	23,812	$	742,118			19.4	%


Twelve Months Ended December 31, 2009
West	$	378,328		$	289,381		$	(24,291	)	$	12,967	$	300,705			20.5	%
Mountain		244,862			215,989			185			9,155		206,649			15.6	%
East		176,072			150,033			(2,965	)		6,556		146,442			16.8	%
Other		52,783			46,442			(712	)		2,032		45,122			14.5	%
Intercompany adjustments		(14,991	)		(14,991	)		—			—		(14,991	)		N/A

Consolidated	$	837,054		$	686,854		$	(27,783	)	$	30,710	$	683,927			18.3	%

(1)	Home Gross Margins excluding the impact of warranty adjustments and interest in home cost of sales is a non-GAAP financial measure. We believe this information is meaningful as it isolates the impact that warranty adjustments and interest have on our Home Gross Margins.

Land Sales Revenue. Land sales revenue was $5.9 million and $30.7 million during the years ended December 31, 2010 and 2009, respectively. Land sales revenue during 2009 primarily resulted from our sale of approximately 1,550 lots, primarily in our West and Other Homebuilding segments compared with less than 110 lots during 2010.

Other Revenue. Gains on the sale of mortgage loans primarily represent revenue earned by HomeAmerican from the sale of HomeAmerican’s originated mortgage loans to third-parties. Insurance revenue represents premiums collected by StarAmerican and Allegiant from our homebuilding subcontractors in connection with the construction of homes primarily comprise insurance revenue. Title and other revenue primarily consist of forfeiture of homebuyer deposits on home sales contracts and revenue associated with our American Home Title operations and our broker origination fees which represent fees that HomeAmerican earns upon brokering a mortgage loan for a home closing.

The table below sets forth the components of other revenue (dollars in thousands).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Gains on sales of mortgage loans, net	$	21,791	$	20,251	$	1,540			8	%
Insurance revenue		6,622		6,115		507			8	%
Title and other revenue		3,337		4,153		(816	)		-20	%

Total other revenue	$	31,750	$	30,519	$	1,231			4	%

Other revenue increased during the year ended December, 2010 primarily due to increases in the gains on sales of mortgage loans and other broker origination fees as we increased our home closings during these periods by 8% from the year ended December 31, 2009.

Home Cost of Sales. Home cost of sales primarily includes land acquisition, land development and related costs (both incurred and estimated to be incurred), specific construction costs of each home, warranty costs and finance and closing costs, including Closing Cost Incentives (defined as homebuyer closing costs assistance paid by Richmond American Homes to a third-party). Home cost of sales excludes expenses associated with commissions, amortization of deferred marketing costs and inventory impairment charges. However, while inventory impairment charges recorded during a reporting period do not impact home cost of sales, they do impact future home cost of sales as they lower the lot cost basis of the impaired inventory.

Our home cost of sales can be impacted primarily from changes in our home closing levels and changes in the cost of land acquisition, development, construction cost of homes and changes in our estimated costs for warranty repairs.

The table below sets forth the home cost of sales by reportable segment (dollars in thousands).


	Year Ended December 31,						Increase (Decrease)
	2010			2009			Amount			%
Homebuilding
West	$	238,175		$	289,381		$	(51,206	)		-18	%
Mountain		308,023			215,989			92,034			43	%
East		178,014			150,033			27,981			19	%
Other Homebuilding		36,661			46,442			(9,781	)		-21	%

Total Homebuilding		760,873			701,845			59,028			8	%
Intercompany adjustments		(15,788	)		(14,991	)		(797	)		5	%

Total	$	745,085		$	686,854		$	58,231			8	%

Home cost of sales increased $58.2 million during the year ended December 31, 2010. Contributing to this increase was the impact of closing 232 more homes, which resulted in a $52.9 million increase to home cost of sales, and an increase in the lot cost per closed home, which resulted in a $54.1 million increase to home cost of sales. Partially offsetting these items was a $52.6 million decrease in home construction cost resulting from a decline in the cost of construction per closed home.

In our West segment, home cost of sales decreased $32.5 million due to closing 179 fewer homes during 2010 and $34.4 million from a decrease in the home cost of construction per closed home. These items were partially offset by a $20.1 increase associated with higher lot costs per closed home. In our Mountain segment, home cost of sales increased by $102.4 million associated with closing 377 more homes and $6.7 million associated with higher lot costs per closed home. Partially offsetting these items was a decrease of $20.4 million associated with lower cost of home construction per closed home.

In our East segment, home cost of sales increased $29.6 million associated with closing 77 more homes and $12.8 million associated with an increase in the lot cost per closed home. Partially offsetting these items was a decrease of $14.5 million associated with lower cost of home construction per closed home. In our Other Homebuilding segment, home cost of sales decreased $8.5 million due to closing 43 fewer homes and $5.0 million associated with the lower cost of home construction per closed home. These items were partially offset by a $4.2 increase associated with higher lot costs per closed home.

Land Cost of Sales. Land cost of sales was $5.4 million and $25.0 million during the years ended December 31, 2010 and 2009, respectively. Land cost of sales during 2009 primarily relates to the sale of approximately 1,550 lots in our West and Other Homebuilding segments compared with less than 110 lots during 2010.

Asset Impairments. The following table sets forth asset impairments recorded by reportable segment (in thousands).


	Year Ended December 31,					Increase (Decrease)
	2010		2009			Increase (Decrease)
Land and Land Under Development (Held-for-Development)
West	$	14,808	$	10,133		$	4,675
Mountain		555		8,913			(8,358	)
East		421		1,600			(1,179	)
Other Homebuilding		121		376			(255	)

Subtotal		15,905		21,022			(5,117	)

Housing Completed or Under Construction (Held-for-Development)
West		3,163		5,379			(2,216	)
Mountain		964		1,646			(682	)
East		569		875			(306	)
Other Homebuilding		594		537			57

Subtotal		5,290		8,437			(3,147	)

Land and Land Under Development (Held-for-Sale)
West		—		(557	)		557
Mountain		—		—			—
East		—		—			—
Other Homebuilding		—		234			(234	)

Subtotal		—		(323	)		323

Other asset impairments		452		1,850			(1,398	)

Total	$	21,647	$	30,986		$	(9,339	)

The 2010 impairments were concentrated in the Arizona and Nevada markets of our West segment and resulted from an increase in forecasted lot costs, which include property taxes and homeowner association dues, driven in part by a slower than anticipated absorption pace and from lowering our estimated average selling prices of homes. This was primarily due to: (1) strong competition for sales of new homes; (2) overall low economic activity combined with high unemployment levels; (3) homebuyers having difficulty qualifying for new loans; and (4) the elevated levels of foreclosures and short sales of homes driving real estate values down.

The following table sets forth the inventory impairments (excluding other assets) that were recorded on a quarterly basis during 2010 and 2009, as well as the fair value of those inventories and the number of lots and subdivisions at the period end to which the impairments relate (dollars in thousands).


								Fair Value of Impaired Inventory at Quarter End		Number of Lots Impaired During the Quarter		Number of Subdivisions Impaired During the Quarter
	Inventory Impairments
Three Months Ended	Held-for- Development		Held-for- Sale			Total Inventory Impairments
September 30, 2010	$	3,633	$	—		$	3,633		7,625		214		8
December 31, 2010		17,562		—			17,562		42,203		964		38

Total	$	21,195	$	—		$	21,195


March 31, 2009	$	14,355	$	—		$	14,355	$	38,602		719		46
June 30, 2009		1,725		(557	)		1,168		2,978		53		2
September 30, 2009		1,103		—			1,103		4,172		61		3
December 31, 2009		12,276		234			12,510		29,536		336		10

Total	$	29,459	$	(323	)	$	29,136

Marketing Expenses. Marketing expenses primarily include advertising, amortization of deferred marketing costs, model home expenses, compensation related expenses and other selling costs. The following table summarizes our marketing expenses by reportable segment (in thousands).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount		%
Homebuilding
West	$	18,508	$	17,234	$	1,274		7	%
Mountain		12,732		9,810		2,922		30	%
East		6,958		6,818		140		2	%
Other Homebuilding		3,124		2,509		615		25	%

Total	$	41,322	$	36,371	$	4,951		14	%

The $5.0 million increase in marketing expenses during the year ended December 31, 2010 reflects increases of: (1) $2.9 million in product advertising, primarily resulting from new advertising signs purchased in most of our subdivisions, and other advertising costs in conjunction with our sales efforts; and (2) $2.1 million in amortization of deferred marketing costs resulting from closing 232 more homes during 2010.

Commission Expenses. Commission expenses include direct incremental commissions paid for closed homes. The following table summarizes our commission expenses by reportable segment (in thousands).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Homebuilding
West	$	12,554	$	13,443	$	(889	)		-7	%
Mountain		12,621		8,846		3,775			43	%
East		7,060		6,614		446			7	%
Other Homebuilding		2,020		2,099		(79	)		-4	%

Total	$	34,255	$	31,002	$	3,253			10	%

Commission expense during the year ended December 31, 2010 increased in our Mountain and East segments, primarily due to closing 377 and 77 more homes, respectively. The decline in commission expense in our West and Other Homebuilding segments resulted from closing 179 and 43 fewer homes, respectively.

General and Administrative Expenses. The following table summarizes our general and administrative expenses by reportable segment (in thousands).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Homebuilding
West	$	29,898	$	26,419	$	3,479			13	%
Mountain		16,038		15,905		133			1	%
East		18,411		19,905		(1,494	)		-8	%
Other Homebuilding		5,128		4,055		1,073			26	%

Total Homebuilding		69,475		66,284		3,191			5	%
Financial Services and Other		22,890		24,207		(1,317	)		-5	%
Corporate		74,628		71,994		2,634			4	%

Total	$	166,993	$	162,485	$	4,508			3	%

Our consolidated general and administrative expense increased $4.5 million during the year ended December 31, 2010. Contributing to this increase were the following: (1) $5.5 million in salaries and salary related costs primarily driven by the increase in our employee headcount during much of the year; (2) $3.1 million associated with vacation expense as we made changes in our vacation policy during 2010 and 2009; (3) $2.9 million associated with stock-based compensation primarily to our Company’s Chief Executive Officer and Chief Operating Officer and their deferred compensation arrangement; (4) $2.0 million primarily associated with health insurance and worker compensation insurance costs; (5) $9.1 million associated with our incurred but not reported insurance reserves as we recorded $4.1 million of adjustments to increase our insurance reserve during 2010 compared with $5.1 million of adjustments to decrease our insurance reserve during 2009; and (6) $1.0 million in travel-related costs. These items partially were offset by decreases in the following expenses: (1) expenses associated with our mortgage loan loss reserves as we incurred $9.7 million of expenses during 2009 that we did not incur during 2010; (2) $5.0 million associated with our homebuilding line of credit that was terminated during the 2010 second quarter; (3) $2.3 million in legal-related matters; and (4) $0.9 million in office-related expenses.

General and administrative expenses in our West segment increased during the year ended December 31, 2010, primarily due to a $2.3 million increase in employee compensation and other employee-related benefit costs. In our Mountain segment, general and administrative costs were slightly higher during the year ended December 31, 2010, primarily due to employee compensation and other employee-related benefit costs.

In our East segment, general and administrative expenses were lower during the year ended December 31, 2010 due to a $2.5 million decrease in legal-related costs, partially offset by a $1.1 million increase in employee compensation and other employee-related benefit costs. In our Other Homebuilding segment, general and administrative costs were higher during the year ended December 31, 2010, primarily due to increased legal-related costs.

In our Financial Services and Other segment, general and administrative expenses decreased during the year ended December 31, 2010, primarily resulting from a $9.7 million decline in expenses associated with our mortgage loan loss reserves. This was partially offset by an increase of $9.1 million in expenses associated with our insurance reserves as we recorded $4.1 million of adjustments to increase our insurance reserve during 2010 compared with $5.1 million of adjustments to decrease our insurance reserve during 2009. We experienced an increase in the frequency and severity in insurance claims that were submitted and/or paid during the year ended December 31, 2010, which caused adjustments that increased our insurance reserve during 2010. However, during 2009, we experienced a decline in the frequency and severity of insurance claims that were received during 2009, which caused adjustments that reduced our insurance reserve during 2009. Also impacting the change in expense for this segment during 2010 was a $0.7 million increase in employee compensation and other employee-related benefit costs primarily resulting from higher headcount during much of the 2010 year.

In our Corporate segment, general and administrative costs were higher during the year ended December 31, 2010, primarily due to the following increases: (1) $7.5 million in employee compensation and other employee-related benefit costs; (2) $0.9 million in travel-related costs; and (4) $0.9 million due to depreciation as we began to depreciate our new enterprise resource planning system. These items partially were offset by a $5.0 million decrease associated with our homebuilding line of credit and a decrease of $2.5 million of inter-company supervisory fees (“Supervisory Fees”) charged by the Corporate segment. See Note 3 to our Consolidated Financial Statements regarding Supervisory Fees.

Other Operating Expenses. Other operating expenses were $3.1 million during the year ended December 31, 2010 and relate primarily to the write-offs of pre-acquisition costs and deposits on lot option contracts that we elected not to exercise. Other operating expenses were $5.6 million during the year ended December 31, 2009 and relate primarily to a valuation allowance recorded against other receivables and write-offs of pre-acquisition cost and deposits.

Related Party Expenses. Related party expense was not significant during the year ended December 31, 2010 and was $1.0 million during the year ended December 31, 2009. The decrease during 2010 is the result of MDC not making a pledge to contribute to the MDC/Richmond American Homes Foundation (the “Foundation”) whereas during 2009, we did pledge to contribute $1.0 million to the Foundation, which was subsequently paid during 2010 in fulfillment of our 2009 commitment.

The Foundation is a nonprofit organization operated exclusively for charitable, educational and other purposes beneficial to social welfare within the meaning of section 501(c)(3) of the Internal Revenue Code (“I.R.C.”). Certain directors and officers of the Company are the trustees and/or officers of the Foundation.

Other Income (Expense). Other income (expense) primarily includes interest income on our cash, cash equivalents and marketable securities, interest expense primarily on our senior notes, and gain or loss on the sale of other assets. Interest income was $26.6 million and $12.2 million during the years ended December 31, 2010 and 2009, respectively. This increase primarily resulted from an increase in our marketable securities balances during 2010.

We capitalize interest on our senior notes associated with our qualifying assets. We have determined that inventory is a qualifying asset during the period of active development of our land and through the completion of construction of a home. When construction of a home is complete, such home is no longer considered to be a qualifying asset and interest is no longer capitalized on that home. During the year ended December 31, 2010, we incurred $72.5 million of interest, an increase of $14.2 million from the year ended December 31, 2009. This increase resulted from the issuance of our 2020 Senior Notes in January of 2010. Additionally, as a result of the increase in our inventory levels from December 31, 2009, we capitalized $33.9 million of interest incurred, an increase of $14.1 million from 2009. During the years ended December 31, 2010 and 2009, we expensed $38.2 million and $38.1 million of interest that was incurred on our senior notes that could not be capitalized, respectively. For a reconciliation of interest incurred, capitalized and expensed, see Note 15 to our Consolidated Financial Statements.

(Loss)/Income Before Income Taxes. The table below summarizes our (loss)/income before income taxes by reportable segment (dollars in thousands).


	Year Ended December 31,						Change
	2010			2009			Amount			%
Homebuilding
West	$	9,909		$	19,144		$	(9,235	)		48	%
Mountain		1,059			(15,686	)		16,745			107	%
East		91			(9,789	)		9,880			101	%
Other Homebuilding		(3,140	)		(4,691	)		1,551			33	%

Total Homebuilding		7,919			(11,022	)		18,941			172	%
Financial Services and Other		10,299			5,953			4,346			73	%
Corporate		(88,819	)		(102,266	)		13,447			13	%

Total	$	(70,601	)	$	(107,335	)	$	36,734			34	%

On a consolidated basis, our loss before income taxes was lower during the year ended December 31, 2010. Contributing to this improvement were: (1) $25.7 million resulting from a 120 basis point increase in Home Gross Margins associated with closing 232 more homes during 2010; (2) a $14.4 million increase in interest income on our cash, cash equivalents and marketable securities; and (3) a $9.3 million decrease in asset impairments. These items partially were offset by a combined $12.7 million increase in sales and marketing, commission and general and administrative expenses.

In our West segment, our income before income taxes was down during the year ended December 31, 2010, primarily driven by a $4.8 million combined increase in sales and marketing and general and administrative expenses, a $3.0 million increase in inventory impairments and closing 179 fewer homes. These items were partially offset by a 380 basis point improvement in Home Gross Margins and a $0.9 million decrease in commission expense. In our Mountain segment, we had income before income taxes during the year ended December 31, 2010, compared with a loss before income taxes during 2009. This improvement was driven by a $9.0 million decrease in inventory impairments, closing 377 more homes and a 70 basis point improvement in Home Gross Margins. These items partially were offset by a combined increase of $6.8 million in sales and marketing, commission and general and administrative expenses.

In our East segment, our loss before income taxes decreased by $9.9 million during the year ended December 31, 2010. This improvement primarily resulted from a $1.5 million decrease in inventory impairments, a 140 basis point

increase in Home Gross Margins, a decrease of $1.5 million in general and administrative expenses and closing 77 more homes. These items were partially offset by a combined increase of $0.6 million in sales and marketing and commission expense. In our Other Homebuilding segment, our loss before income taxes decreased by $1.6 million during the year ended December 31, 2010. This improvement primarily resulted from a $0.4 million decrease in inventory impairments and a 620 basis point increase in Home Gross Margins. These items partially were offset by a combined increase of $1.7 million in sales and marketing and general and administrative expenses and closing 43 fewer homes.

In our Financial Services and Other segment, income before income taxes improved primarily resulting from a $9.7 million decline in expenses associated with our mortgage loan loss reserves, a $1.8 million increase in revenue driven by gains on sales of mortgage loans and insurance premium income and an $0.8 million increase in interest income. This was partially offset by an increase of $9.1 million in expenses associated with our insurance reserves as we recorded $4.1 million of adjustments to increase our insurance reserve during 2010 compared with $5.1 million of adjustments to decrease our insurance reserve during 2009.

In our Corporate segment, our loss before income taxes were lower during the year ended December 31, 2010 primarily resulting from a $13.8 million increase in interest income. Also contributing to this improvement was the impact of recording a $1.0 million impairment of our related party asset during 2009, for which we did not have an impairment during the year ended December 31, 2010. These items partially were offset by a $2.6 million increase in general and administrative expenses.

Income Taxes. Our income tax assets and liabilities and related effective tax rate are affected by various factors, the most significant of which is the valuation allowance recorded against our deferred tax assets. Due to the effect of our valuation allowance adjustments in 2010 and 2009, our effective tax rates for these years are not meaningful.

Our overall effective income tax rates were 8.3% and 123.0% for the years ended December 31, 2010 and 2009, respectively. The 8.3% effective tax rate for the year ended December 31, 2010 was primarily attributable to the finalization of various state income tax examinations and the inability to carry back any federal net operating losses at December 31, 2010. The 123.0% effective tax rate for the year ended December 31, 2009 was primarily attributable to the carryback of $142.6 million of tax effected net operating losses due to the expanded NOL carryback provisions contained in the Worker, Homeownership, and Business Assistance Act of 2009, enacted on November 6, 2009. These expanded NOL carryback provisions allowed us to carry back our 2009 tax losses to prior years. Absent the new legislation, these 2009 tax losses would have been carried forward to offset future taxable income.

Homebuilding Operating Activities

The table below sets forth information relating to orders for homes (dollars in thousands).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Orders For Homes, net (Units)
Arizona		552		723		(171	)		-24	%
California		301		320		(19	)		-6	%
Nevada		532		556		(24	)		-4	%

West		1,385		1,599		(214	)		-13	%

Colorado		855		700		155			22	%
Utah		358		282		76			27	%

Mountain		1,213		982		231			24	%

Maryland		231		241		(10	)		-4	%
Virginia		233		227		6			3	%

East		464		468		(4	)		-1	%

Florida		198		238		(40	)		-17	%
Illinois		1		19		(18	)		-95	%

Other Homebuilding		199		257		(58	)		-23	%

Total		3,261		3,306		(45	)		-1	%

Estimated Value of Orders for Homes, net	$	920,000	$	935,000	$	(15,000	)		-2	%

Estimated Average Selling Price of Orders for Homes, net	$	282.1	$	282.8	$	(0.7	)		0	%

Orders for Homes. Despite new homes becoming more affordable, continued low interest rate levels and special sales promotions, net orders for homes declined in nearly each of our homebuilding segments during the year ended December 31, 2010. Contributing to this decline was the impact of severe competition for home orders with other homebuilders and significant declines in orders for homes following the expiration of the federal homebuyer tax credit on April 30, 2010. In our Mountain segment, net orders for homes increased during the year ended December 31, 2010. This improvement was due in part to special sales promotions during the year and to the impact of the federal homebuyer tax credit.

Homes Closed. The following table sets forth homes closed for each market within our homebuilding segments (in units).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Arizona		571		778		(207	)		-27	%
California		298		293		5			2	%
Nevada		544		521		23			4	%

West		1,413		1,592		(179	)		-11	%

Colorado		789		565		224			40	%
Utah		383		230		153			67	%

Mountain		1,172		795		377			47	%

Maryland		231		200		31			16	%
Virginia		236		190		46			24	%

East		467		390		77			20	%

Florida		193		214		(21	)		-10	%
Illinois		—		22		(22	)		-100	%

Other Homebuilding		193		236		(43	)		-18	%

Total		3,245		3,013		232			8	%

Home closings were up 8% during the year ended December 31, 2010 due to increases in our Mountain and East segments. The improvement in these segments was driven by having more homes in Backlog leading into the 2010 year compared with leading into the 2009 year. Also contributing to the increase in home closings in our Mountain segment was an increase in net orders for homes and converting approximately 70% of these orders into home closings during the 2010 year. In our West segment, homes closed were down during the year ended December 31, 2010 as we had more net orders for homes during 2009 that were converted to closings during this period, compared with the 2010 period.

Backlog. The following table sets forth information relating to Backlog within each market of our homebuilding segments (dollars in thousands).


	December 31,				Increase (Decrease)
	2010		2009		Amount			%
Arizona		84		103		(19	)		-18	%
California		79		76		3			4	%
Nevada		76		88		(12	)		-14	%

West		239		267		(28	)		-10	%

Colorado		273		207		66			32	%
Utah		69		94		(25	)		-27	%

Mountain		342		301		41			14	%

Maryland		126		126		—			0	%
Virginia		70		73		(3	)		-4	%

East		196		199		(3	)		-2	%

Florida		64		59		5			8	%
Illinois		1		—		1			N/M	*

Other Homebuilding		65		59		6			10	%

Total		842		826		16			2	%

Backlog Estimated Sales Value	$	269,000	$	265,000	$	4,000			2	%

Estimated Average Selling Price of Homes in Backlog	$	319.5	$	320.8	$	(1.3	)		0	%

*	N/M – Not Meaningful

We define “Backlog” as homes under contract but not yet delivered. Our December 31, 2010 Backlog increased by 16 units from December 31, 2009, attributable to the Colorado market of our Mountain segment as net orders for homes in this market increased during the year ended December 31, 2010, compared with the year ended December 31, 2009.

Cancellation Rate. We define our home order “Cancellation Rate” as the approximate number of cancelled home purchase contracts during a reporting period as a percentage of total home purchase contracts received during such reporting period. The following tables set forth our Cancellation Rate by segment.


	Year Ended December 31,
	2010			2009			Increase
Homebuilding
West		26	%		21	%		5	%
Mountain		33	%		25	%		8	%
East		33	%		28	%		5	%
Other Homebuilding		36	%		25	%		11	%

Consolidated		30	%		24	%		6	%

The Cancellation Rate increased in each of our homebuilding segments during the year ended December 31, 2010 due in part to homebuyers not being able to qualify for mortgage loans, our prospective homebuyers having difficulty selling their existing homes and low consumer confidence in the housing market.

Active Subdivisions. The following table displays the number of our active subdivisions for each market within our homebuilding segments. We define an active subdivision as a subdivision that has more than five homes available to be sold and closed and has sold at least five homes.


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Arizona		26		28		(2	)		-7	%
California		13		3		10			333	%
Nevada		18		18		—			0	%

West		57		49		8			16	%

Colorado		39		42		(3	)		-7	%
Utah		19		16		3			19	%

Mountain		58		58		—			0	%

Maryland		14		9		5			56	%
Virginia		8		7		1			14	%

East		22		16		6			38	%

Florida		11		10		1			10	%
Illinois		—		—		—			N/M	*

Other Homebuilding		11		10		1			10	%

Total		148		133		15			11	%

*	N/M - Not Meaningful

Our active subdivisions increased from December 31, 2009, primarily resulting from an increase in the California market of our West segment as we have begun selling and closing homes in subdivisions that were purchased in 2009 and 2010. In addition, 65 new communities are close to reaching active status, while only 28 active subdivisions are nearing inactive status.

Average Selling Prices Per Home Closed. The average selling price for our closed homes includes the base sales price, any purchased options and upgrades, reduced by any Sales Price Incentives (defined as discounts on the sales price of a home) or Mortgage Loan Origination Fees (defined as mortgage loan origination fees paid by Richmond American Homes to HomeAmerican). The following tables set forth our average selling prices per home closed, by market (dollars in thousands).


	Year Ended December 31,				Increase (Decrease)
	2010		2009		Amount			%
Arizona	$	195.6	$	194.3	$	1.3			1	%
California		377.3		417.5		(40.2	)		-10	%
Colorado		313.9		316.5		(2.6	)		-1	%
Florida		232.1		214.5		17.6			8	%
Illinois		N/A		313.0		N/A			N/A
Maryland		439.4		422.4		17.0			4	%
Nevada		190.4		201.2		(10.8	)		-5	%
Utah		272.3		287.1		(14.8	)		-5	%
Virginia		469.6		482.8		(13.2	)		-3	%
Consolidated	$	283.8	$	277.8	$	6.0			2	%

The average selling price of our closed homes increased 2% during the year ended December 31, 2010 primarily resulting from closing a higher percentage of homes in our Colorado market where the average selling price of closed homes exceeded the consolidated average selling prices of closed homes. In most of our markets however, we experienced declines in the average selling prices of homes due to a change in the mix of homes we delivered to our newer and smaller products. We did see an increase in the average selling price of closed homes in our Florida and Maryland markets primarily from a shift in product mix as we closed a higher concentration of homes in higher priced subdivisions.

Inventory. Our inventory consists of housing completed or under construction and land and land under development. Housing completed or under construction in our Consolidated Balance Sheets primarily includes: (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 and permit fees; (4) capitalized interest; and (5) certain indirect fees. Land and land under development on our Consolidated Balance Sheets primarily includes land acquisition costs, land development costs associated with subdivisions for which we have the intent to construct and sell homes and capitalized interest.

The following table shows the carrying value of housing completed or under construction for each market within our homebuilding segments (dollars in thousands).


	December 31,				Increase (Decrease)
	2010		2009		Amount		%
Arizona	$	31,923	$	30,838	$	1,085		4	%
California		49,516		23,890		25,626		107	%
Nevada		33,377		23,714		9,663		41	%

West		114,816		78,442		36,374		46	%

Colorado		111,397		85,537		25,860		30	%
Utah		26,372		19,239		7,133		37	%

Mountain		137,769		104,776		32,993		31	%

Maryland		48,740		30,636		18,104		59	%
Virginia		45,836		29,739		16,097		54	%

East		94,576		60,375		34,201		57	%

Florida		24,262		16,731		7,531		45	%
Illinois		999		—		999		N/M	*

Other Homebuilding		25,261		16,731		8,530		51	%

Total	$	372,422	$	260,324	$	112,098		43	%

*	N/M - Not Meaningful

The table below shows the stage of construction for our homes completed or under construction, number of sold homes under construction and model homes (in units).


	December 31, 2010		December 31, 2009
Unsold Homes Under Construction - Final		119		41
Unsold Homes Under Construction - Frame		722		389
Unsold Homes Under Construction - Foundation		103		109

Total Unsold Homes Under Construction		944		539
Sold Homes Under Construction		609		570
Model Homes		242		212

Total		1,795		1,321

Our housing completed and under construction increased by $112.1 million, as we increased the total homes under construction to 1,795 at December 31, 2010 from 1,321 at December 31, 2009. This increase was primarily attributable to a 75% increase in the number of unsold homes under construction. The building of our unsold homes under construction resulted primarily from an increase in active subdivisions and the anticipation of selling homes prior to the expiration of the federal homebuyer tax credit, which required the sale of a home to be completed by April 30, 2010 with a closing date by June 30, 2010. (The Homebuyer Assistance and Improvement Act, signed into law July 2, 2010, extended the closing

date requirement to September 30, 2010.) However our total unsold homes under construction remained high compared with December 31, 2009 as a result of the continued low levels of net orders for homes during the year ended December 31, 2010. Additionally, we increased the number of model homes during 2010 by 30 units, which was the result of building approximately 150 new models in our new and existing subdivisions and closing on the sale of approximately 120 of our older model units.

The following table shows the carrying value of land and land under development for each market within our homebuilding segments (dollars in thousands).


	December 31,				Increase (Decrease)
	2010		2009		Amount			%
Arizona	$	41,892	$	32,839	$	9,053			28	%
California		93,194		36,790		56,404			153	%
Nevada		32,605		27,591		5,014			18	%

West		167,691		97,220		70,471			72	%

Colorado		128,727		97,406		31,321			32	%
Utah		30,457		24,093		6,364			26	%

Mountain		159,184		121,499		37,685			31	%

Maryland		31,782		9,501		22,281			235	%
Virginia		44,083		26,071		18,012			69	%

East		75,865		35,572		40,293			113	%

Florida		9,274		5,329		3,945			74	%
Illinois		3,223		3,240		(17	)		-1	%

Other Homebuilding		12,497		8,569		3,928			46	%

Total	$	415,237	$	262,860	$	152,377			58	%

The tables below show the total number of lots owned (excluding homes completed or under construction) and lots controlled under option agreements for each market within our homebuilding segments (in units).


	December 31,					Increase (Decrease)
	2010			2009		Amount		%
Lots Owned
Arizona		1,257			1,075		182		17	%
California		1,201			581		620		107	%
Nevada		991			966		25		3	%

West		3,449	<