Edgar Filing: MDC HOLDINGS INC

mdc20171231_10k.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 2017

☐ 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	(I.R.S. Employer
of incorporation or organization)	Identification No.)

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

(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
5⅝% Senior Notes due February 2020	New York Stock Exchange
5½% Senior Notes due January 2024
6% Senior Notes due January 2043	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. X

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

Large Accelerated Filer X Accelerated Filer___

Non-Accelerated Filer __ (Do not check if a smaller reporting company) Smaller Reporting Company__ Emerging Growth Company__

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ___

Indicate 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, 2017, the aggregate market value of the Registrants' common stock held by non-affiliates of the Registrants was $1.5 billion based on the closing sales price of $35.33 per share as reported on the New York Stock Exchange on June 30, 2017.

As of December 31, 2017, the number of shares outstanding of Registrant's common stock was 56,123,228.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of part III of this Form 10-K are incorporated by reference from the Registrant's 2018 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.

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M.D.C. HOLDINGS, INC.

FORM 10-K

For the Year Ended December 31, 2017

_______________

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		Page No.
PART I

ITEM 1.	Business
	(a) General Development of Business	1
	(b) Available Information	1
	(c) Financial Information About Industry Segments	2
	(d) Narrative Description of Business	2
ITEM 1A.	Risk Factors	6

ITEM 1B.	Unresolved Staff Comments	11

ITEM 2.	Properties	11

ITEM 3.	Legal Proceedings	11

ITEM 4.	Mine Safety Disclosures	11

PART II

ITEM 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	12

ITEM 6.	Selected Financial Data	14

ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	39

ITEM 8.	Consolidated Financial Statements	F-1

ITEM 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	41

ITEM 9A.	Controls and Procedures	41

ITEM 9B.	Other Information	43

PART III

ITEM 10.	Directors, Executive Officers and Corporate Governance	43

ITEM 11.	Executive Compensation	43

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	43

ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	43

ITEM 14.	Principal Accountant Fees and Services	43

PART IV

ITEM 15.	Exhibits and Financial Statement Schedules	44

ITEM 16.	Form 10-K Summary	48

SIGNATURES		49

(i)

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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. These forward-looking statements may be identified by terminology such as “likely,” “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue,” or the negative of such terms and other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained in this Report 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. 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 considered.

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 or develop lots to the extent necessary for the construction and sale primarily 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 various homebuilding divisions that we consider to be our operating segments. For financial reporting, we have aggregated our homebuilding operating segments into reportable segments as follows: (1) West (includes operating segments located in Arizona, California, Nevada and Washington); (2) Mountain (includes operating segments located in Colorado and Utah); and (3) East (includes operating segments located in Virginia, Florida and Maryland, which includes Pennsylvania, and New Jersey).

Our financial services operations primarily consist of (1) HomeAmerican Mortgage Corporation (“HomeAmerican”), which originates mortgage loans primarily for our homebuyers, (2) Allegiant Insurance Company, Inc., A Risk Retention Group (“Allegiant”), which provides insurance coverage primarily to our homebuilding subsidiaries on homes that have been delivered and most of our subcontractors for completed work on those delivered homes, (3) StarAmerican Insurance Ltd., which is a re-insurer on Allegiant claims, (4) American Home Insurance Agency, Inc., which offers third-party insurance products to our homebuyers, and (5) American Home Title and Escrow Company, which provides title agency services to our homebuilding subsidiaries and our customers in certain states. For financial reporting, we have aggregated our financial services operating segments into reportable segments as follows: (1) mortgage operations (represents HomeAmerican only) and (2) other (all remaining operating segments).

(b) Available Information

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 free of charge on our website as soon as reasonably practicable after we file or furnish the materials electronically with the Securities and Exchange Commission (“SEC”). To obtain any of this information, go to our website, www.mdcholdings.com, and select “SEC Filings” from the “Financial Reports” menu. Our website 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, Legal and Corporate Governance/Nominating Committees. These materials may also be obtained, free of charge, at www.mdcholdings.com (select “Corporate Governance”).

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Note 3 to the Consolidated Financial Statements contains information regarding our reportable segments for each of the years ended December 31, 2017, 2016 and 2015.

(d) Narrative Description of Business

Our business consists of two primary operations, homebuilding and financial services. Our homebuilding subsidiaries build and sell primarily single-family detached homes that are designed and built to meet local customer preferences. Each homebuilding subsidiary is the general contractor for its projects and retains subcontractors for land development and home construction. Our homebuilding subsidiaries build a variety of home styles in each of their markets, targeting primarily first-time and first-time move-up homebuyers.

For 2017, the percentage of our home deliveries and home sale and land sale revenues by state were as follows:

	Percentage			Percentage
	of			of Home Sale
	Deliveries			Revenues
Arizona		15	%		10	%
California		16	%		22	%
Nevada		16	%		12	%
Washington		7	%		8	%
West		54	%		52	%
Colorado		27	%		28	%
Utah		4	%		4	%
Mountain		31	%		32	%
Maryland		3	%		4	%
Virginia		4	%		5	%
Florida		8	%		7	%
East		15	%		16	%
Total		100	%		100	%

Our financial services operations include subsidiaries that provide mortgage financing, place title insurance and homeowner insurance for our homebuyers, and provide general liability insurance for our subsidiaries and most of our subcontractors.

Homebuilding Operations

Operating Divisions. The primary functions of our homebuilding segments include land acquisition and development, home construction, sales and marketing, and customer service. Operating decisions are made by our local management teams under the oversight of our Chief Operating Decision Maker (“CODM”), or decision-making group, defined as two key executives - our Chief Executive Officer and Chief Operating Officer. Our organizational structure (i.e., the grouping and reporting of divisions) changes based upon the current needs of the Company. We had 15, 13 and 13 active homebuilding operating divisions at the end of each year ended December 31, 2017, 2016 and 2015, respectively.

Corporate Management. Our homebuilding business is managed primarily through members of senior management in our Corporate segment and our Asset Management Committees (“AMCs”). Each AMC is comprised of the Chief Operating Officer, Chief Financial Officer and one of our other corporate officers. All real estate acquisition transactions are reviewed to confirm that the transaction is projected to achieve the objectives established by our decision-making group and must be approved by one of the AMCs. Generally, the role of our senior management team and/or AMC includes:

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review and approval of division business plans and budgets;

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oversight of land and home inventory levels;

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review of major personnel decisions; and

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review of capital allocation decisions.

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

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asset management and capital allocation;

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treasury;

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insurance and risk management;

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merchandising and marketing;

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national purchasing contracts;

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accounting, tax and internal audit functions;

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legal matters;

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human resources and payroll;

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information technology; and

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training and development.

Housing. Generally, our homebuilding subsidiaries 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. In certain markets, our homebuilding subsidiaries build and sell attached townhomes. Within each series of our single-family detached homes, our homebuilding subsidiaries 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 homebuyer demand, home prices offered by our competitors, market conditions (such as home inventory supply levels), location, cost of land, 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. In general, our homebuilding subsidiaries focus on selling “to be built homes”, also referred to as “dirt sales”, and limit the number of homes started without a contract.

Land Acquisition and Development. Our homebuilding subsidiaries acquire lots with the intention of constructing and selling homes on the acquired land. Generally, we prefer to purchase finished lots using option contracts, in phases or in bulk for cash. However, competition for finished lots has increased and therefore, approximately one-half of the lots we now purchase require some level of development. In making land purchases, we consider a number of factors, including projected rates of return, estimated gross margins from home sales, sales prices of the homes to be built, mortgage loan limits within the respective county, population and employment growth patterns, proximity to developed areas, estimated cost and complexity of development including environmental and geological factors, quality of schools, estimated levels of competition and demographic trends.

In their option contracts, our homebuilding subsidiaries 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 they elect not to purchase the lots within a specified period of time, they may be required to forfeit the option deposit. Our option contracts do not contain provisions requiring our specific performance.

Our homebuilding subsidiaries may own or have the right under option contracts to acquire undeveloped parcels of real estate that they intend to develop into finished lots. They generally develop our land in phases in order to limit our risk in a particular subdivision and to efficiently employ available capital resources. Generally, 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.

Labor and Raw Materials. Materials used in our homebuilding operations are mainly 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 the cost of building materials and labor 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 gross margins from home sales 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 gross margins from home sales, or both. See “Forward-Looking Statements” above.

Warranty. Our homebuilding subsidiaries sell their homes 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, our homebuilding subsidiaries perform all of the work for the first two years of the warranty coverage and pay for substantially all of the work required to be performed during years three through ten of the warranties.

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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, 2017 and 2016, homes under contract but not yet delivered (“backlog”) totaled 3,159 and 2,884, respectively, with an estimated sales value of $1.60 billion and $1.38 billion, respectively. We anticipate that homes in backlog at December 31, 2017 generally will close during 2018 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, 2017 may be impacted by, among other things, subsequent home order cancellations, incentives provided, and/or options and upgrades selected. See “Forward-Looking Statements” above.

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.

Sales and Marketing. Our sales and marketing programs are designed to attract homebuyers in a cost effective manner. We have a centralized in-house advertising and marketing department, including digital marketing, that oversees our efforts to communicate the inherent value of our homes to our prospective homebuyers and distinguish our Richmond American Homes brand from our competitors or other home buying opportunities. The main objective of this team is to generate homebuyer leads, which are actively pursued by our community sales associates. Our centralized in-house merchandising team furnishes our model homes and sales offices.

Another important part of our marketing presentation takes place in our design centers (also known as Home Galleries). Here, homebuyers are able to personalize their homes with a variety of options and upgrades. These locations also serve as an information center for prospective homebuyers and real estate agents who may opt to receive personalized attention from one of our new home specialists, resulting in a more focused and efficient home search across all of our Richmond American communities in a given market place. We believe that the services provided by our Home Galleries represent a key competitive advantage in attracting and retaining prospective homebuyers.

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.

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.

Financial Services Operations

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 is authorized to originate Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) (together “the government-sponsored enterprises”), Federal Housing Administration-insured (“FHA”), and Department of Veterans Affairs-guaranteed (“VA”) mortgages and is an authorized issuer of Government National Mortgage Association (“Ginnie Mae”) mortgage-backed securities. Furthermore, HomeAmerican also is an authorized loan servicer for Fannie Mae, Freddie Mac and Ginnie Mae and, as such, is subject to the rules and regulations of these entities.

HomeAmerican uses a mortgage repurchase facility, internally generated funds, and temporary financing provided by its parent, to finance the origination of mortgage loans until they are sold. HomeAmerican sells originated mortgage loans to third-party purchasers on either a bulk or flow basis. Mortgage loans sold on a bulk basis include the sale of a package of substantially similar originated mortgage loans, while sales of mortgage loans on a flow basis are completed as HomeAmerican originates each loan. Mortgage loans sold to third-party purchasers include HomeAmerican’s representations and warranties with respect to certain borrower payment defaults, credit quality issues and/or misrepresentations made by HomeAmerican or our homebuyers. Substantially all of the mortgage loans originated by HomeAmerican are sold to third-party purchasers, generally within 10 to 35 days of origination.

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Pipeline. HomeAmerican’s mortgage loans in process for which a rate and price commitment had been made to a borrower that had not closed (the “locked pipeline”) at December 31, 2017 and 2016 had an aggregate principal balance of approximately $66.6 million and $110.9 million, respectively, and were under interest rate lock commitments at an average interest rate of 4.15% and 4.11%, respectively.

Forward Sales Commitments. HomeAmerican is exposed to market risks related to fluctuations in interest rates. HomeAmerican creates certain derivative instruments in the normal course of business, which primarily include commitments to originate mortgage loans (interest rate lock commitments or locked pipeline). HomeAmerican uses forward sales of mortgage-backed securities and commitments from third-parties to purchase loans to hedge the interest rate risk inherent with the locked pipeline, as well as its loan inventory held for sale. The market related risks in our business are described in more detail in our description of Risk Factors.

Competition. HomeAmerican has significant competition with other mortgage bankers to arrange financing for our homebuyers. However, in selling its originated mortgages to third parties, HomeAmerican has benefited from an increased number of smaller non-bank entities entering the third-party purchaser space, resulting in better prices and a potentially wider array of product options. The competitive nature of our mortgage business is described in more detail in our description of Risk Factors.

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.

Insurance Operations

General. Allegiant and StarAmerican were formed to provide insurance coverage of homebuilding risks for our homebuilding subsidiaries and most of our 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. Pursuant to agreements executed on an annual basis since June of 2004, StarAmerican has re-insured 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 generally by providing to its customers, comprised of the Company’s homebuilding subsidiaries and most subcontractors of the Company’s homebuilding subsidiaries, general liability insurance 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 including known facts, such as our 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.

Regulation. 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 is also registered in other states where certain MDC homebuilding subsidiaries do business.

Insurance Agency Operations

American Home Insurance is an insurance agency that sells primarily homeowners’ personal property and casualty insurance products in the same markets as our homebuilding subsidiaries and primarily to our homebuyers.

Title Operations

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

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Employees.

The table below summarizes the approximate number of employees for our combined Homebuilding, combined Financial Services and Corporate segments at December 31, 2017 and 2016.

	December 31,
	2017		2016
Homebuilding		1,109		963
Financial Services		146		135
Corporate		236		220
Total		1,491		1,318

Item 1A. Risk Factors.

Changes in general economic, real estate and other business conditions may have an adverse effect on the homebuilding and mortgage industries, which could have a negative impact on our business.

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

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employment levels;

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availability of financing for homebuyers;

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interest rates;

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consumer confidence;

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wage growth;

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household formations;

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levels of new and existing homes for sale;

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cost of land, labor and construction materials;

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demographic trends; and

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housing demand.

These conditions may exist on a national level 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.

Changes to monetary policy or other actions by the Federal Reserve could have an adverse effect on interest rates (including mortgage interest rates), equity markets and consumer confidence. Such effects could cause us to experience declines in the market value of our inventory and the demand for our homes, resulting in a negative impact to our financial position, results of operations and cash flows.

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, depress new home prices and reduce our margins on the sale of new homes. High levels of foreclosures and short-sales not only contribute to additional inventory available for sale, but also can reduce appraisal valuations for new homes, potentially resulting in lower sales prices.

Terrorist attacks, acts of war, 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 gross 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.

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Additionally, the factors discussed above may increase our counterparty risk, which may include, among others, banks under our credit facilities and mortgage purchasers who may not be willing or able to perform on obligations to us. To the extent a third-party is unable or unwilling to meet its obligations, our financial position, results of operations and cash flows could be negatively impacted.

Our mortgage operations are closely related to our homebuilding business, as HomeAmerican originates mortgage loans principally to purchasers of the homes we build. Therefore, a decrease in the demand for our homes because of the preceding matters may also adversely affect the financial results of this segment of our business. Furthermore, any adverse changes in the economic conditions discussed previously could increase the default rate on the mortgages we originate, which may adversely affect our ability to sell the mortgages, the pricing we receive upon the sale of mortgages, or our potential exposure to recourse regarding mortgage loan sales.

These challenging conditions are complex and interrelated. We cannot predict their occurrence or severity, nor can we provide assurance that our responses would be successful.

Increased competition levels in the homebuilding and mortgage lending industries could have a negative impact on our homebuilding and mortgage 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 than us and may 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 is based primarily on home sales price, location of property, home style, financing available to prospective homebuyers, 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 by an excess supply of new and existing homes available for sale resulting from a number of factors, including, among other things, increases in the number of new home communities, increases in speculative homes available for sale and increases in home foreclosures. Increased competition can result in a decrease in our net new home orders, a decrease in our home sales prices and/or an increase in our home sales incentives in an effort to generate new home sales and maintain homes in backlog until they close. These competitive pressures may negatively impact our financial position, results of operations and cash flows.

Our mortgage lending subsidiary, HomeAmerican, experiences competition from numerous banks and other mortgage bankers and brokers, many of which are larger and may have greater financial resources. As a result, these competitors may be able to offer better pricing and/or mortgage loan terms, more relaxed underwriting criteria and a greater range of products, which could negatively impact the financial position, results of operations and cash flows of our mortgage operations.

If land is not available at reasonable prices or terms, we could be required to scale back our operations in a given market and/or we may operate at lower levels of profitability.

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, 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 is limited because of these factors, or for any other reason, the number of homes that our homebuilding subsidiaries build and sell may decline. To the extent that we are unable to purchase land timely 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, we may be required to scale back our operations in a given market and/or we may operate at lower levels of profitability. As a result, our financial position, results of operations and cash flows could be negatively impacted.

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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 price fluctuations and shortages in labor and materials from time to time. Shortages in labor can be due to: work stoppages, labor disputes, shortages in qualified trades people, lack of availability of adequate utility infrastructure and services, or our need to rely on local subcontractors who may not be adequately capitalized or insured. 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 or leaving the residential construction market due to low levels of housing production and volumes. Pricing for labor and materials can be affected by the factors discussed above, changes in energy prices, and various other national, regional and local economic factors. Recalls of materials driven by manufacturing defects can drive shortages in materials and delay the delivery of homes. 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/or increase the construction cost of our homes.

We generally are unable to pass on increases in construction costs to customers who have already entered into sales contracts, as those sales contracts fix the price of the homes at the time the contracts are signed, which may be in advance of the construction of the home. 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 financial position, cash flows and operating results, including our gross margin from home sales, could be negatively impacted.

If mortgage interest rates rise, if down payment requirements are increased, if loan limits are decreased, or if mortgage financing otherwise becomes less available, it could adversely affect our business.

Mortgage liquidity influenced by governmental entities like the FHA, VA, USDA and Ginnie Mae or government-sponsored enterprises (“GSEs”) like Fannie Mae and Freddie Mac continue to be an important factor in marketing our homes. Financial losses or other factors may limit, restrict or otherwise curtail their ability or willingness to insure mortgage loans, offer insurance at rates and on terms that are not prohibitive, or purchase mortgage loans. Should this occur, it may negatively impact the availability of mortgage financing and our sales of new homes.

We believe that the liquidity provided by Fannie Mae, Freddie Mac and Ginnie Mae to the mortgage industry has been very important to the housing market. The future of Fannie Mae and Freddie Mac are in question and any reduction in the availability of the liquidity provided by these institutions could adversely affect interest rates, mortgage availability and our sales of new homes and mortgage loans.

Loans sold to or insured by the GSEs are subject to various loan limits. Decreases in these loan limits may require homebuyers to make larger down payments or obtain more restrictive non-conforming or “jumbo” mortgages, which could adversely impact on our financial position, results of operations and cash flows.

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 may be affected and could result in further reductions in the demand for our homes.

Changes to tax laws, incentives or credits currently available to our customers may negatively impact our business.

Many homeowners receive substantial tax benefits in the form of tax deductions against their personal taxable income for mortgage interest and property tax payments and the loss or reduction of these deductions could affect homeowners’ net cost of owning a home. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 was enacted. As a result of the Tax Cuts and Jobs Act, substantial changes were made to personal income tax rates and the deductibility of (1) mortgage interest, (2) state and local taxes and (3) real property taxes, among other items. The impact of these changes is currently unknown. However, the changes resulting from the Tax Cuts and Jobs Act, in addition to any other future changes to existing tax laws, may result in an increase in the total cost of home ownership and may make the purchase of a home less attractive to buyers. This could adversely impact demand for and/or sales prices of new homes, which would have a negative impact on our business.

A decline in the market value of our homes or carrying value of our land would have a negative impact on our business.

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 inventory 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 sale prices, levels of home sale incentives and home construction and land costs. Our home sale prices and/or levels of home sale incentives can be impacted by, among other things, uncertainty in the homebuilding and mortgage industries or the United States/global economy overall, decreased demand for new homes, decreased home prices offered by our competitors, home foreclosure and short-sale levels, decreased ability of our homebuyers to obtain suitable mortgage loan financing and high levels of home order cancellations. Under such circumstances, we may be required to record impairments of our inventory. Any such inventory impairments would have a negative impact on our financial position and results of operations.

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

The climates and geology of many of the markets in which we operate 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 position, results of operations and cash flows of our business may be negatively impacted.

Changes in energy prices or regulations may have an adverse effect on our cost of building homes.

Some of the markets in which we operate are impacted by regulations related to energy, such as setbacks required from oil / gas drilling operations or restrictions on the use of land. To the extent that these regulations are modified, the value of land we already own or the availability of land we are looking to purchase may decline, which may adversely impact the financial position, results of operations and cash flows of our business. Furthermore, pricing offered by our suppliers and subcontractors can be adversely affected by increases in various energy costs resulting in a negative impact to our financial position, results of operations and cash flows of our business.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets, and disruptions in these markets could have an adverse impact on the results of our business.

We have financial needs that we meet through the capital markets, including the debt and secondary mortgage markets. Our requirements for additional capital, whether to finance operations or to service or refinance our existing indebtedness, fluctuate as market conditions and our financial performance and operations change. We cannot provide assurance that we will maintain cash reserves and generate sufficient cash flow from operations in an amount to enable us to service our debt or to fund other liquidity needs.

The availability of additional capital, whether from private capital sources or the public capital markets, fluctuates as our financial condition and market conditions in general change. There may be times when the private capital markets and the public debt or equity markets lack sufficient liquidity or when our securities cannot be sold at attractive prices, in which case we would not be able to access capital from these sources. Additionally, any reduction in our credit rankings and/or a weakening of our financial condition, could adversely affect our ability to obtain necessary funds. Even if financing is available, it could be costly or have other adverse consequences.

In addition, the sources and terms and conditions of our mortgage repurchase facility are subject to change. These changes may impact, among other things, availability of capital, cost of borrowings, collateral requirements and collateral advance rates.

Our business is subject to numerous federal, state and local 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. 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.

Availability of and costs related to permit, water/sewer tap, and impact fees can impact our homebuilding operations. 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 similar measures could reduce our ability to open new subdivisions and build and sell homes in the affected markets. The availability issues previously discussed and any increases in costs of these fees may negatively impact our financial position, results of operations and cash flows.

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.

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. Environmental laws and regulations may also have a negative impact on the availability and price of certain raw materials, such as lumber.

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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 regulatory environment for mortgage lending is complex and ever changing and has led to an increase in the number of audits and examinations in the industry. These examinations can include 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.

In the ordinary course of business, we are required to obtain surety bonds, the unavailability of which could adversely affect our business.

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 surety bonds. If we are unable to obtain surety bonds when required, our financial position, results of operations and cash flows could be adversely impacted.

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

We have a material amount of investments in marketable securities, 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 financial position, results of operations and cash flows.

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 or directly paying for 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 financial position, results of operations and cash flows.

Repurchase requirements associated with HomeAmerican’s sale of mortgage loans, could negatively impact our business.

We are subject to risks associated with mortgage loans, including conventional mortgage loans, FHA and VA mortgage loans, 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 and/or the settlement of claims associated with such loans could have a negative impact on HomeAmerican’s financial position, results of operations and cash flows.

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 delivered and the associated home sale revenues 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 and summer with deliveries scheduled in the fall or winter, as well as the scheduling of construction to accommodate seasonal weather conditions in certain markets.

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

Although we believe that we have made provision for adequately staffing current operations, because of competition for experienced homebuilding industry personnel, retaining our skilled people is an important area of focus. 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 position, results of operations and cash flows.

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

Larry A. Mizel and David D. Mandarich beneficially own, directly or indirectly through their affiliates, in the aggregate, approximately 26% 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.

Information technology failures and data security breaches could harm our business.

We use information technology and other computer resources to carry out important operational activities and to maintain our business records. These information technology systems are dependent upon electronic systems and other aspects of the internet infrastructure. A material breach in the security of our information technology systems or other data security controls could result in third parties obtaining customer, employee or company data. Such occurrences could have a material and adverse effect on our financial position, results of operations and cash flows.

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 all 144,000 square feet of office space in the building. In many of our markets, our homebuilding divisions and other MDC subsidiaries lease additional office space. While we are currently satisfied with the suitability and capacity of our office locations to meet our current business needs, we continue to evaluate them in view of market conditions and the size of our operations.

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.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

At December 31, 2017, we had 571 shareholders of record. The shares of our common stock are traded on the New York Stock Exchange. The following table sets forth, for the periods indicated, the closing price ranges of our common stock. On November 21, 2017, the Company announced an 8% stock dividend that was distributed on December 19, 2017 to shareholders of record on December 5, 2017. On November 22, 2016, the Company announced a 5% stock dividend that was distributed on December 20, 2016 to shareholders of record on December 6, 2016. In accordance with Accounting Standards Codification 260, “Earnings per Share”, basic and diluted earnings per share amounts, weighted-average shares outstanding, and dividends declared per share have been restated for all periods presented to reflect the effect of these stock dividends.

	Three Months Ended
	March 31		June 30		September 30		December 31
2017
High	$	28.70	$	34.01	$	33.46	$	34.53
Low		24.01		27.06		28.05		29.99

2016
High	$	22.10	$	22.82	$	24.08	$	25.51
Low		17.24		19.27		21.47		19.89

The table below sets forth the cash dividends declared and paid in 2017, 2016 and 2015.

					Total
	Date of	Date of	Dividend		Dividends
	Declaration	Payment	per Share		Paid
					(In thousands)
2017
First Quarter	01/23/17	02/22/17	$	0.23	$	12,897
Second Quarter	04/24/17	05/24/17		0.23		12,912
Third Quarter	07/24/17	08/23/17		0.23		12,984
Fourth Quarter	10/23/17	11/22/17		0.23		12,986
			$	0.93	$	51,779

2016
First Quarter	01/25/16	02/24/16	$	0.22	$	12,252
Second Quarter	04/18/16	05/25/16		0.22		12,252
Third Quarter	07/25/16	08/24/16		0.22		12,259
Fourth Quarter	10/24/16	11/23/16		0.22		12,258
			$	0.88	$	49,021

2015
First Quarter	01/26/15	02/25/15	$	0.22	$	12,213
Second Quarter	04/27/15	05/27/15		0.22		12,212
Third Quarter	07/20/15	08/19/15		0.22		12,221
Fourth Quarter	10/19/15	11/18/15		0.22		12,222
			$	0.88	$	48,868

On January 22, 2018, the Company declared a cash dividend of $0.30 per share payable February 21, 2018 to shareholders of record on February 7, 2018.

There were no shares of MDC common stock repurchased during the years ended December 31, 2017, 2016 or 2015. At December 31, 2017, we were authorized to repurchase up to 4,000,000 shares of our common stock.

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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, 2017, weighted as of the beginning of that period.

It is assumed in the graph that $100 was invested (1) in our 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. and Toll Brothers, Inc.

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

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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 our Consolidated Financial Statements.

	Year Ended December 31,
	2017		2016		2015		2014		2013
	(Dollars in thousands, except per share amounts)
Income Statement Data
Home sale and land sale revenues	$	2,503,242	$	2,262,853	$	1,860,226	$	1,650,631	$	1,629,175
Financial services revenues		74,372		63,991		48,810		43,953		51,259
Total revenues	$	2,577,614	$	2,326,844	$	1,909,036	$	1,694,584	$	1,680,434

Homebuilding pretax income ⁽¹⁾⁽²⁾	$	185,939	$	115,378	$	70,441	$	75,804	$	100,323
Financial services pretax income		43,793		36,403		30,983		24,671		29,502
Total income before income taxes	$	229,732	$	151,781	$	101,424	$	100,475	$	129,825

Net income ^(1)(2)(3)	$	141,835	$	103,211	$	65,791	$	63,143	$	314,385
Basic earnings per share	$	2.54	$	1.86	$	1.19	$	1.14	$	5.68
Diluted earnings per share	$	2.48	$	1.85	$	1.18	$	1.14	$	5.63
Weighted Average Common Shares Outstanding:
Basic		55,663,908		55,389,898		55,298,825		55,130,023		54,931,220
Diluted		56,901,461		55,562,920		55,528,826		55,359,119		55,360,627

Balance Sheet Data
Cash and cash equivalents	$	505,428	$	282,909	$	180,988	$	153,825	$	199,338
Marketable securities	$	91,638	$	96,206	$	103,694	$	156,140	$	588,067
Total inventories	$	1,829,736	$	1,758,814	$	1,763,962	$	1,667,960	$	1,411,661
Total assets	$	2,780,292	$	2,528,589	$	2,415,899	$	2,351,456	$	2,589,619
Senior notes, net ⁽¹⁾⁽⁴⁾	$	986,597	$	841,646	$	840,524	$	839,468	$	1,089,790
Mortgage repurchase facility	$	112,340	$	114,485	$	88,611	$	60,822	$	63,074
Stockholders' equity	$	1,407,287	$	1,320,070	$	1,256,292	$	1,228,336	$	1,213,249
Stockholders' equity per common share ⁽⁵⁾	$	25.07	$	23.74	$	22.66	$	22.18	$	21.94
Cash dividends declared per share ⁽⁶⁾	$	0.93	$	0.88	$	0.88	$	0.88	$	0.00

Operational Data
Homes delivered (units)		5,541		5,054		4,390		4,366		4,710
Average selling price	$	451	$	447	$	421	$	377	$	345
Net new orders (units)		5,816		5,606		5,203		4,623		4,327
Homes in backlog at period end (units)		3,159		2,884		2,332		1,519		1,262
Estimated backlog sales value at period end	$	1,602,000	$	1,382,000	$	1,054,000	$	663,000	$	506,000
Estimated average selling price of homes in backlog	$	507	$	479	$	452	$	437	$	401
Active subdivisions at period-end		151		164		167		159		146

____________________________

(1)

During 2014, we redeemed our 5⅜% Senior Notes due December 2014 and our 5⅜% Senior Notes due July 2015. As a result of these transactions, we paid $517.7 million to extinguish $500 million in debt principal and recorded a total of $18.2 million in losses from early extinguishments of debt.

(2)

During 2017, we realized a pretax gain of $53.6 million on investment sales.

(3)

Net income for the year ended December 31, 2013 includes the impact of a $187.6 million reversal of the valuation allowance against our deferred tax asset in the 2013 second quarter.

(4)

During 2017, we issued an additional $150.0 million of our 6.000% senior notes due January 2043 for net proceeds of $146.5 million.

(5)

As a result of the stock dividends distributed during 2017 and 2016, the stockholders’ equity per common share amounts for the years ended December 31, 2016, 2015, 2014, and 2013 have been adjusted.

(6)

Total dividends declared per share for the year ended December 31, 2013 were $0.00 as there was an accelerated payment of dividends for 2013 in 2012.

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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 Relating to our Business.”

	Year Ended December 31,
	2017			2016			2015
	(Dollars in thousands, except per share amounts)
Homebuilding:
Home sale revenues	$	2,498,695		$	2,257,153		$	1,847,889
Land sale revenues		4,547			5,700			12,337
Total home and land sale revenues		2,503,242			2,262,853			1,860,226
Home cost of sales		(2,073,833	)		(1,884,391	)		(1,539,396	)
Land cost of sales		(4,440	)		(4,866	)		(12,611	)
Inventory impairments		(10,010	)		(10,173	)		(9,993	)
Total cost of sales		(2,088,283	)		(1,899,430	)		(1,562,000	)
Gross margin		414,959			363,423			298,226
Gross margin %		16.6	%		16.1	%		16.0	%
Selling, general and administrative expenses		(287,488	)		(250,540	)		(226,317	)
Interest and other income		7,714			6,033			7,988
Net realized gains (losses) from the sales of marketable securities		17,775			979			(1,279	)
Realized gain from the sale of metropolitan district bond securities (related party)		35,847			-			-
Other expense		(2,817	)		(3,447	)		(4,208	)
Other-than-temporary impairment of marketable securities		(51	)		(1,070	)		(3,969	)
Homebuilding pretax income		185,939			115,378			70,441

Financial Services:
Revenues		74,372			63,991			48,810
Expenses		(34,534	)		(30,920	)		(21,572	)
Interest and other income		4,190			3,705			3,745
Other-than-temporary impairment of marketable securities		(235	)		(373	)		-
Financial services pretax income		43,793			36,403			30,983

Income before income taxes		229,732			151,781			101,424
Provision for income taxes		(87,897	)		(48,570	)		(35,633	)
Net income	$	141,835		$	103,211		$	65,791

Earnings per share:
Basic	$	2.54		$	1.86		$	1.19
Diluted	$	2.48		$	1.85		$	1.18

Weighted average common shares outstanding:
Basic		55,663,908			55,389,898			55,298,825
Diluted		56,901,461			55,562,920			55,528,826

Cash dividends declared per share	$	0.93		$	0.88		$	0.88

Cash provided by (used in):
Operating Activities	$	65,472		$	115,917		$	215
Investing Activities	$	57,790		$	9,218		$	47,362
Financing Activities	$	99,257		$	(23,214	)	$	(20,414	)

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EXECUTIVE SUMMARY

Overview

Results for the Twelve Months Ended December 31, 2017

For the year ended December 31, 2017, we reported net income of $141.8 million, or $2.48 per diluted share, a 37% increase compared to net income of $103.2 million, or $1.85 per diluted share for the year earlier period. The increase was primarily due to an 11% improvement in home sale revenues, a 50 basis point improvement in gross margin from home sales percentage, $53.6 million in realized gains due to the sales of investments held by our Corporate segment and a $7.4 million improvement in pretax income from our financial services operations. These items were slightly offset by a 40 basis point increase in our selling, general and administrative (“SG&A”) expenses as a percentage of home sale revenues (“SG&A rate”) and a 630 basis point increase in our effective tax rate from 32.0% to 38.3%. Our higher effective tax rate was primarily the result of the impact on our net deferred tax assets from the Tax Cuts and Jobs Act that was signed into law on December 22, 2017.

Home sale revenues were up from $2.26 billion in 2016 to $2.50 billion in 2017. The improvement was primarily the result of a 10% increase in deliveries due mostly to a 24% increase in units in backlog to begin the year.

The dollar value of net new home orders increased by 6% year-over-year, as our number of net new orders and average selling price increased by 4% and 3%, respectively. A 9% year-over-year increase in our monthly sales absorption pace, which was partially offset by a 4% decline in average active communities, drove the increase in the number of net new orders.

Our financial services pretax income was $43.8 million for the year ended December 31, 2017, a 20%, increase from $36.4 million for the year ended December 31, 2016. The increase was primarily due to our mortgage operations segment, which had (1) increases in the dollar value of loans locked, originated, and sold and (2) higher gains on loans locked, originated and sold.

Industry Conditions and Outlook for MDC

The homebuilding industry was supported by solid economic fundamentals in 2017, driving robust demand for new homes, especially in the affordable homebuyer segment. We took a number of steps throughout 2017 to help us capture the growing demand for new homes.

First, we approved the purchase of nearly 10,400 lots, which is more than double the approvals from the prior year. Increasingly, our lot approvals have focused on more affordable product, including one of our newest product lines, the Seasons^TM collection. We have also introduced several other product lines that are designed with affordability in mind.

Second, we announced that we will commence operations in the greater Portland area, giving us additional exposure to the Pacific Northwest, where we have experienced solid results.

Third, we enhanced our financial profile by (1) expanding the capacity under our line of credit to $700 million and extending its maturity by two years to December 2022, and (2) adding $150 million to our 6.000% senior notes due January 2043 (the “6% Notes”).

We ended 2017 with overall liquidity of $1.25 billion and a backlog sales value of $1.60 billion, representing increases of 39% and 16% over 2016, respectively. The higher liquidity provides us with additional resources to fund future lot acquisitions and community count growth, while our higher backlog sales value gives us a solid foundation to grow revenues year-over-year in 2018.*

Other

Defective Weyerhaeuser Joists

During the 2017 third quarter, we were notified by Weyerhaeuser Company, a product vendor, of a manufacturing defect with certain of its floor I-joists used in certain homes built in our Colorado market (the “joist issue”). The joist issue impacted 216 homes, 23 of which had already closed. Due to the joist issue, 122 of the homes, which were originally scheduled to close in 2017, are now expected to close in the first half of 2018. The vendor has committed to us that it will absorb the costs associated with the removal and replacement of the defective joists. While this issue negatively impacted our number of homes delivered, monthly sales absorption rate and cancellation rate in our Colorado market during the last half of 2017, we do not believe the resolution of this issue will be material to our consolidated results of operations, liquidity, or our financial condition.*

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Tax Cuts and Jobs Act of 2017

As a result of the Tax Cuts and Jobs Act, we believe our effective tax rate in 2018 will be significantly lower than the effective tax rate we have experienced over the most recent years.*

* See "Forward-Looking Statements" above.

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Homebuilding

Pretax Income (Loss)

	Year Ended December 31,
			Change								Change
	2017		Amount		%			2016			Amount		%			2015
	(Dollars in thousands)
West	$	79,719	$	6,125		8	%	$	73,594		$	8,967		14	%	$	64,627
Mountain		86,428		13,324		18	%		73,104			20,397		39	%		52,707
East		14,418		9,469		191	%		4,949			10,982		N/M			(6,033	)
Corporate		5,374		41,643		115	%		(36,269	)		4,591		11	%		(40,860	)
Total homebuilding pretax income	$	185,939	$	70,561		61	%	$	115,378		$	44,937		64	%	$	70,441

N/M – Not meaningful

Homebuilding pretax income for 2017 was $185.9 million, an increase of $70.6 million from $115.4 million for the year ended December 31, 2016. The increase was primarily attributable to an 11% increase in home sale revenues, a 50 basis point improvement in gross margin from home sales percentage and $53.6 million in realized gains due to the sales of investments held by our Corporate segment. The increases were slightly offset by a higher SG&A rate driven by compensation-related expenses that increased due to higher headcount. The year-over-year improvements in pretax income for our West and Mountain segments were driven primarily by higher home sale revenues of 17% and 7%, respectively. Pretax income was negatively impacted in our West segment as a result of a $4.6 million increase in impairments while pretax income was positively impacted in our Mountain segment by an improving gross margin from home sales percentage. Our East segment had a $9.5 million improvement in pretax income primarily as a result of a $4.4 million reduction in inventory impairments. The pretax gain for our Corporate segment was driven by the realized gains on the sales of investments discussed above, partially offset by an increase in compensation-related expenses.

Homebuilding pretax income for 2016 was $115.4 million, an increase of $44.9 million from $70.4 million for the year ended December 31, 2015. The increase was primarily attributable to a 22% increase in home sale revenues, coupled with a 110 basis point improvement in our SG&A rate. The year-over-year increases in pretax income for each of our West, Mountain and East segments were driven primarily by higher home sale revenues of 23%, 24% and 15%, respectively, coupled with improvements in each segment’s SG&A rate. The pretax loss for our Corporate segment was reduced from the prior year primarily as a result of an increase in interest and other income and a decrease in stock-based compensation expense.

Assets

	December 31,				Change
	2017		2016		Amount			%
	(Dollars in thousands)
West	$	1,084,756	$	1,035,033	$	49,723			5	%
Mountain		674,057		571,139		102,918			18	%
East		201,684		256,816		(55,132	)		(21)	%
Corporate		597,589		454,507		143,082			31	%
Total homebuilding assets	$	2,558,086	$	2,317,495	$	240,591			10	%

Total homebuilding assets increased 10% from December 31, 2016 to December 31, 2017, mostly driven by our Mountain and Corporate segments. Our Mountain segment had (1) higher land and land under development balances due to strong land acquisition activity during the twelve months ended December 31, 2017, and (2) a higher number of homes completed or under construction as a result of an increase in backlog under construction. Our Corporate segment assets increased as a result of significant cash inflows from the issuance of an additional $150 million under our 6% Notes and positive operating results. Corporate segment cash was utilized to increase inventories in our West and Mountain operating segments. Homebuilding assets in our East segment are down from December 31, 2016 due to tempered land acquisition activity in Maryland and Virginia as our returns in these markets have been lower than the returns we expect to realize.

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Home and Land Sale Revenues

	Year Ended December 31,
			Change							Change
	2017		Amount		%			2016		Amount		%			2015
	(Dollars in thousands)
West	$	1,316,069	$	187,556		17	%	$	1,128,513	$	213,254		23	%	$	915,259
Mountain		805,669		48,672		6	%		756,997		147,995		24	%		609,002
East		381,504		4,161		1	%		377,343		41,378		12	%		335,965
Total home and land sale revenues	$	2,503,242	$	240,389		11	%	$	2,262,853	$	402,627		22	%	$	1,860,226

Home and land sale revenues increased $240.4 million for the year ended December 31, 2017, due to a 10% increase in new home deliveries. For the year ended December 31, 2016, home and land sale revenues increased $402.6 million year-over-year, due primarily to a 15% increase in new home deliveries and a 6% increase in the average selling price of new home deliveries.

New Home Deliveries:

	Year Ended December 31,
	2017						2016						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		821	$	260,043	$	316.7		789	$	232,511	$	294.7		4	%		12	%		7	%
California		889		540,459		607.9		807		495,934		614.5		10	%		9	%		(1)	%
Nevada		870		302,911		348.2		683		238,441		349.1		27	%		27	%		(0)	%
Washington		410		212,656		518.7		345		161,628		468.5		19	%		32	%		11	%
West		2,990		1,316,069		440.2		2,624		1,128,514		430.1		14	%		17	%		2	%
Colorado		1,471		709,741		482.5		1,369		671,308		490.4		7	%		6	%		(2)	%
Utah		220		91,903		417.7		219		80,679		368.4		0	%		14	%		13	%
Mountain		1,691		801,644		474.1		1,588		751,987		473.5		6	%		7	%		0	%
Maryland		190		89,853		472.9		243		114,079		469.5		(22)	%		(21)	%		1	%
Virginia		237		125,690		530.3		262		135,394		516.8		(10)	%		(7)	%		3	%
Florida		433		165,439		382.1		337		127,179		377.4		28	%		30	%		1	%
East		860		380,982		443.0		842		376,652		447.3		2	%		1	%		(1)	%
Total		5,541	$	2,498,695	$	450.9		5,054	$	2,257,153	$	446.6		10	%		11	%		1	%

	Year Ended December 31,
	2016						2015						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		789	$	232,511	$	294.7		753	$	220,140	$	292.4		5	%		6	%		1	%
California		807		495,934		614.5		706		370,603		524.9		14	%		34	%		17	%
Nevada		683		238,441		349.1		575		215,479		374.7		19	%		11	%		(7)	%
Washington		345		161,628		468.5		270		109,038		403.8		28	%		48	%		16	%
West		2,624		1,128,514		430.1		2,304		915,260		397.2		14	%		23	%		8	%
Colorado		1,369		671,308		490.4		1,192		553,573		464.4		15	%		21	%		6	%
Utah		219		80,679		368.4		149		52,794		354.3		47	%		53	%		4	%
Mountain		1,588		751,987		473.5		1,341		606,367		452.2		18	%		24	%		5	%
Maryland		243		114,079		469.5		215		103,148		479.8		13	%		11	%		(2)	%
Virginia		262		135,394		516.8		216		105,593		488.9		21	%		28	%		6	%
Florida		337		127,179		377.4		314		117,521		374.3		7	%		8	%		1	%
East		842		376,652		447.3		745		326,262		437.9		13	%		15	%		2	%
Total		5,054	$	2,257,153	$	446.6		4,390	$	1,847,889	$	420.9		15	%		22	%		6	%

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For the year ended December 31, 2017, the year-over-year changes in homes delivered in most of our markets were primarily the result of the year-over-year change in the number of units in backlog to begin the year. In our Maryland and Virginia markets, while we started the year with beginning backlog units up from the prior year, our number of homes delivered was down primarily due to declines in the number of net new orders in the first part of 2017 as a result of reductions in community count. Our Washington and Utah markets experienced the largest year-over-year increases in the average selling price of homes delivered due to a combination of price increases implemented in most communities coupled with a shift in mix to higher priced communities. In Colorado, where we have experienced the most significant roll-out of our Seasons™ product line, we experienced a slight decrease in the average selling price of homes delivered.

For the year ended December 31, 2016, the number of homes delivered for all of our markets increased compared to the prior year as our beginning backlogs in 2016 were up significantly year-over-year. However, the benefit to deliveries from our higher beginning backlog was somewhat offset by extended cycle times on homes sold throughout the year primarily as a result of issues with subcontractor availability in certain of our larger markets. Our California and Washington markets, which each experienced significant increases in their average selling price, benefited from price increases in most of their communities during 2016 coupled with a shift in the mix of deliveries to higher priced communities.

Gross Margin

Our gross margin from home sales percentage for the year ended December 31, 2017 increased 50 basis points year-over-year to 16.6%. The twelve months ended December 31, 2017 included $10.0 million of inventory impairments (a 40 basis point negative impact to gross margin percentage) and $1.3 million of adjustments to increase our warranty accrual (a 10 basis point negative impact to gross margin percentage), while the same period in 2016 included $10.2 million of inventory impairments (a 50 basis point negative impact to gross margin percentage) and $7.5 million of adjustments to increase our warranty accrual (a 30 basis point negative impact to gross margin percentage). The warranty adjustments were primarily due to an unexpected increase in warranty related expenditures, which began during the second half of 2015 and continued, to a lesser extent, through 2017. See below for further discussion of the inventory impairments.

Our gross margin from home sales percentage for the year ended December 31, 2016 decreased 10 basis points year-over-year to 16.1%, as $7.5 million in adjustments to increase our warranty accrual were mostly offset by the positive impact from a higher percentage of our deliveries coming from build-to-order sales, which typically have higher gross margin percentages when compared to deliveries of homes that were started without a sales contract.

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Inventory Impairments

During the year ended December 31, 2017, we recorded $10.0 million of inventory impairments, of which $3.3 million related to five projects in our East segment, $6.0 million related to four projects in our West segment and $0.8 million related to one project in our Mountain segment. During the year ended December 31, 2016, we recorded $10.2 million of inventory impairments, of which $7.6 million related to five projects in our East segment, $1.4 million related to one project in our West segment and $1.2 million related to one project in our Mountain segment. During the year ended December 31, 2015, we recorded $10.0 million of inventory impairments, of which $1.2 million was related to impairments on our land held for sale in two communities; one in our West segment and one in our Mountain segment. The remaining $8.8 million in impairments related to nine projects with the majority coming from our East segment; four in Maryland totaling $3.3 million and three in Virginia totaling $5.2 million. Inventory impairments recognized by segment for the years ended December 31, 2017, 2016 and 2015 are shown in the table below.

	Year Ended December 31,
	2017		2016		2015
	(Dollars in thousands)
Housing Completed or Under Construction:
West	$	4,733	$	364	$	-
Mountain		390		574		250
East		2,720		1,390		1,378
Subtotal		7,843		2,328		1,628
Land and Land Under Development:
West		1,252		1,036		648
Mountain		380		589		569
East		535		6,220		7,148
Subtotal		2,167		7,845		8,365
Total Inventories	$	10,010	$	10,173	$	9,993

The table below provides quantitative data, for the periods presented, used in determining the fair value of the impaired inventory, excluding impairments related to land held for sale.

	Impairment Data								Quantitative Data
Three Months Ended	Total Subdivisions Tested		Inventory Impairments		Fair Value of Inventory After Impairments		Number of Subdivisions Impaired		Discount Rate

	(Dollars in thousands)
March 31, 2017		33	$	4,850	$	19,952		2		12%	to	18%
June 30, 2017		35		-		-		-			N/A
September 30, 2017		33		4,540		52,190		9		10%	-	15%
December 31, 2017		23		620		14,245		2		10%	-	12%
Total			$	10,010

March 31, 2016		14	$	-	$	-		-			N/A
June 30, 2016		17		1,600		6,415		2		12%	to	15%
September 30, 2016		25		4,700		12,295		2		15%	to	18%
December 31, 2016		40		3,873		23,657		3		12%	to	15%
Total			$	10,173

March 31, 2015		22	$	350	$	3,701		1			9%
June 30, 2015		22		-		-		-			N/A
September 30, 2015		18		3,225		14,836		5		12%	to	15%
December 31, 2015		15		5,200		19,925		3		15%	to	20%
Total			$	8,775

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Selling, General and Administrative Expenses

	Year Ended December 31,
	2017			Change		2016			Change		2015
	(Dollars in thousands)
General and administrative expenses	$	137,674		$	19,598	$	118,076		$	5,942	$	112,134
General and administrative expenses as a percentage of home sale revenues		5.5	%	30 bps			5.2	%	(90) bps			6.1	%

Marketing expenses	$	66,388		$	7,610	$	58,778		$	6,361	$	52,417
Marketing expenses as a percentage of home sale revenues		2.7	%	10 bps			2.6	%	(20) bps			2.8	%

Commissions expenses	$	83,426		$	9,740	$	73,686		$	11,920	$	61,766
Commissions expenses as a percentage of home sale revenues		3.3	%	0 bps			3.3	%	0 bps			3.3	%
Total selling, general and administrative expenses	$	287,488		$	36,948	$	250,540		$	24,223	$	226,317
Total selling, general and administrative expenses as a percentage of home sale revenues (SG&A Rate)		11.5	%	40 bps			11.1	%	(110) bps			12.2	%

For the year ended December 31, 2017, our SG&A expenses increased $36.9 million to $287.5 million, resulting in a year-over-year increase in our SG&A rate of 40 basis points. The increase in our SG&A rate was driven primarily by higher compensation-related expenses due to increased headcount.

For the year ended December 31, 2016, our SG&A expenses were up $24.2 million to $250.5 million, while our SG&A rate improved 110 basis points year-over-year. The improvement in our SG&A rate was driven primarily by an increased ability to leverage our fixed overhead as a result of our 22% increase in home sale revenues and, to a lesser extent, a decline in our stock-based compensation expense.

Realized gains (losses) from the sales of marketable securities, net

Our realized gains (losses) from the sales of marketable securities for the twelve months ended December 31, 2017, 2016 and 2015 were $17.8 million, $1.0 million and $(1.3) million, respectively. The year-over-year increase for the twelve months ended December 31, 2017 was related to the sale of a large portion of our marketable equity securities.

Realized gain from the sale of metropolitan district bond securities

During the year ended December 31, 2017, we sold our metropolitan district bond securities for net proceeds of $44.3 million. With a cost basis of $8.4 million, we recorded a realized gain of $35.8 million.

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Other Homebuilding Operating Data

Net New Orders:

	Year Ended December 31,
	2017								2016								% Change
	Homes		Dollar Value		Average Price		Monthly Absorption Rate *		Homes		Dollar Value		Average Price		Monthly Absorption Rate *		Homes			Dollar Value			Average Price			Monthly Absorption Rate *
	(Dollars in thousands)
Arizona		825	$	273,047	$	331.0		2.66		790	$	241,584	$	305.8		2.21		4	%		13	%		8	%		20	%
California		957		611,067		638.5		4.05		946		577,840		610.8		3.88		1	%		6	%		5	%		4	%
Nevada		917		331,827		361.9		3.85		795		278,369		350.1		3.09		15	%		19	%		3	%		25	%
Washington		395		219,533		555.8		3.66		403		198,442		492.4		2.57		(2)	%		11	%		13	%		42	%
West		3,094		1,435,474		464.0		3.47		2,934		1,296,235		441.8		2.89		5	%		11	%		5	%		20	%
Colorado		1,673		826,488		494.0		3.20		1,511		727,192		481.3		3.69		11	%		14	%		3	%		(13)	%
Utah		203		93,387		460.0		2.20		215		83,343		387.6		2.18		(6)	%		12	%		19	%		1	%
Mountain		1,876		919,875		490.3		3.05		1,726		810,535		469.6		3.39		9	%		13	%		4	%		(10)	%
Maryland		150		66,994		446.6		1.73		245		114,250		466.3		1.73		(39)	%		(41)	%		(4)	%		0	%
Virginia		218		112,647		516.7		3.47		272		142,073		522.3		2.75		(20)	%		(21)	%		(1)	%		26	%
Florida		478		163,507		342.1		2.30		429		173,266		403.9		2.14		11	%		(6)	%		(15)	%		7	%
East		846		343,148		405.6		2.37		946		429,589		454.1		2.15		(11)	%		(20)	%		(11)	%		10	%
Total		5,816	$	2,698,497	$	464.0		3.12		5,606	$	2,536,359	$	452.4		2.85		4	%		6	%		3	%		9	%

	Year Ended December 31,
	2016								2015								% Change
	Homes		Dollar Value		Average Price		Monthly Absorption Rate *		Homes		Dollar Value		Average Price		Monthly Absorption Rate *		Homes			Dollar Value			Average Price			Monthly Absorption Rate
	(Dollars in thousands)
Arizona		790	$	241,584	$	305.8		2.21		843	$	233,180	$	276.6		2.07		(6)	%		4	%		11	%		7	%
California		946		577,840		610.8		3.88		856		493,037		576.0		3.55		11	%		17	%		6	%		9	%
Nevada		795		278,369		350.1		3.09		615		221,756		360.6		3.62		29	%		26	%		(3)	%		(15)	%
Washington		403		198,442		492.4		2.57		394		168,477		427.6		2.50		2	%		18	%		15	%		3	%
West		2,934		1,296,235		441.8		2.89		2,708		1,116,450		412.3		2.77		8	%		16	%		7	%		4	%
Colorado		1,511		727,192		481.3		3.69		1,435		671,797		468.2		2.97		5	%		8	%		3	%		24	%
Utah		215		83,343		387.6		2.18		217		77,698		358.1		2.58		(1)	%		7	%		8	%		(16)	%
Mountain		1,726		810,535		469.6		3.39		1,652		749,495		453.7		2.91		4	%		8	%		4	%		16	%
Maryland		245		114,250		466.3		1.73		237		112,027		472.7		2.02		3	%		2	%		(1)	%		(14)	%
Virginia		272		142,073		522.3		2.75		227		112,265		494.6		2.12		20	%		27	%		6	%		30	%
Florida		429		173,266		403.9		2.14		379		139,040		366.9		2.18		13	%		25	%		10	%		(2)	%
East		946		429,589		454.1		2.15		843		363,332		431.0		2.12		12	%		18	%		5	%		1	%
Total		5,606	$	2,536,359	$	452.4		2.85		5,203	$	2,229,277	$	428.5		2.68		8	%		14	%		6	%		6	%

* Calculated as total net new orders in period ÷ average active communities during period ÷ number of months in period

For the twelve months ended December 31, 2017, the dollar value of net new orders was up year-over-year as a slight increase in the average selling price of net new orders and a 9% improvement in our monthly sales absorption pace was partially offset by a lower average active community count. Every market in our West and Mountain segments had year-over-year improvements in the dollar value of net new orders and, with the exception of Colorado, all of these markets experienced an improved monthly sales absorption pace mostly due to sound economic fundamentals driving solid demand for new homes. While most of these markets had year-over-year declines in average active community count, the strong improvement in monthly sales absorption pace, notably in our Arizona, Nevada and Washington markets, almost or completely offset the declines in average active communities. We saw the largest improvement in sales pace in our Washington market, which benefited from robust demand in newly opened communities. In our Colorado market, a 29% year-over-year increase in the number of average active subdivisions was partially offset by a lower monthly sales absorption pace that was negatively impacted by a number of factors including (1) a higher cancellation rate and lower sales pace in the 2^nd half of 2017 as a result of the joist issue and (2) a higher number of sales coming from close-out (i.e. inactive) communities in 2016 compared to the same metric in 2017. In our East segment, each of our markets experienced a year-over-year decline in the dollar value of net new orders. Both of our Maryland and Virginia markets experienced the most significant decreases in the number of new orders as a result of substantial declines in average activity community count. Our Florida market experienced the most significant decline in average selling price of net new orders as a result of a shift in mix of sales to communities with lower selling prices.

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During the year ended December 31, 2016, we experienced year-over-year improvements in the dollar value of net new orders in all of our markets, resulting in a total year-over-year increase to the dollar value of net new orders of 14% or $307.1 million. Washington experienced the largest increase in average selling price percentage due to both a shift in mix to higher priced communities and price increases implemented in selling communities throughout 2016. Our Nevada and Virginia markets each experienced the largest percentage improvement in the number of net new orders. In our Virginia market, this was due to an increased monthly sales absorption pace resulting from certain communities that opened late in 2015 having a full year of strong sales activity in 2016. A 50% year-over-year increase in the number of average active communities drove the improvement in Nevada. However, the impact on net new orders from this higher average active community count was slightly offset by a year-over-year decline in monthly sales absorption pace as the 2015 monthly sales absorption pace was at unusually high levels during the first half of 2015. The absorption paces for our Colorado and California markets were among the strongest in the Company, with robust demand in each market.

Active Subdivisions:

	Active Subdivisions							Average Active Subdivisions
	December 31,							Year Ended December 31,
	2017		% Change			2016		2017		2016		% Change
Arizona		26		(7)	%		28		26		30		(13)	%
California		22		10	%		20		20		20		0	%
Nevada		19		(10)	%		21		20		21		(5)	%
Washington		6		(57)	%		14		9		13		(31)	%
West		73		(12)	%		83		75		84		(11)	%
Colorado		49		29	%		38		44		34		29	%
Utah		7		(22)	%		9		8		8		0	%
Mountain		56		19	%		47		52		42		24	%
Maryland		3		(70)	%		10		7		12		(42)	%
Virginia		5		(29)	%		7		5		8		(38)	%
Florida		14		(18)	%		17		17		17		0	%
East		22		(35)	%		34		29		37		(22)	%
Total		151		(8)	%		164		156		163		(4)	%

At December 31, 2017, we had 151 active subdivisions, an 8% decrease from 164 active subdivisions at the end of 2016. However, during 2017, we approved the acquisition of almost 10,400 lots, representing a year-over-year increase of more than 100%. As shown below in our lots owned and optioned section, the increased lot approval activity has substantially increased our lots controlled year-over-year, which we expect to drive increases in our active subdivision count in the future*. Additionally, as of December 31, 2017 our soon-to-be-active subdivision count was greater than our soon-to-be-inactive subdivision count for the first time since our 2015 third quarter.

Active subdivisions in our Washington market were down 57% year-over-year as of December 31, 2017, driven by the closeout of subdivisions earlier than anticipated due to strong sales pace and lower than anticipated land acquisition activity due to increased competition. In Colorado, we have seen not only strong growth in our active subdivision count but also in our number of lots controlled as we have been successful in identifying multiple land acquisition opportunities while still focusing on affordability, which we believe is a key issue in the metro Denver area. In Virginia and Maryland, we have tempered our land acquisition activity over the past two years as our recent returns in this segment have been lower than expected. For all remaining markets, the year-over-year changes were primarily driven by the timing of opening new subdivisions versus closing out older ones, with many subdivisions closing earlier than anticipated due to higher monthly absorption paces during 2017 compared to 2016.

* See "Forward-Looking Statements" above.

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Cancellation Rate:

	Cancellations As a Percentage of Gross Sales
	Year Ended December 31,
	2017			Change			2016			Change			2015
Arizona		22	%		(5)	%		27	%		3	%		24	%
California		18	%		(6)	%		24	%		3	%		21	%
Nevada		14	%		(4)	%		18	%		0	%		18	%
Washington		20	%		2	%		18	%		(1)	%		19	%
West		18	%		(4)	%		22	%		1	%		21	%
Colorado		21	%		1	%		20	%		(1)	%		21	%
Utah		25	%		3	%		22	%		6	%		16	%
Mountain		22	%		2	%		20	%		(1)	%		21	%
Maryland		26	%		0	%		26	%		8	%		18	%
Virginia		19	%		(1)	%		20	%		(5)	%		25	%
Florida		24	%		(3)	%		27	%		0	%		27	%
East		23	%		(2)	%		25	%		1	%		24	%
Total		20	%		(2)	%		22	%		1	%		21	%

Our cancellations as a percentage of gross sales in total and on an individual market-by-market basis have been relatively consistent among the years ended December 31, 2017, 2016 and 2015.

Backlog:

	At December 31,
	2017						2016						% Change
	Homes		Dollar Value		Average Price		Homes		Dollar Value		Average Price		Homes			Dollar Value			Average Price
	(Dollars in thousands)
Arizona		326	$	119,601	$	366.9		322	$	104,899	$	325.8		1	%		14	%		13	%
California		549		387,339		705.5		481		314,305		653.4		14	%		23	%		8	%
Nevada		354		138,174		390.3		307		108,720		354.1		15	%		27	%		10	%
Washington		222		129,068		581.4		237		120,305		507.6		(6)	%		7	%		15	%
West		1,451		774,182		533.6		1,347		648,229		481.2		8	%		19	%		11	%
Colorado		1,166		594,384		509.8		964		466,565		484.0		21	%		27	%		5	%
Utah		87		43,611		501.3		104		41,689		400.9		(16)	%		5	%		25	%
Mountain		1,253		637,995		509.2		1,068		508,254		475.9		17	%		26	%		7	%
Maryland		52		22,647		435.5		92		45,160		490.9		(43)	%		(50)	%		(11)	%
Virginia		92		48,972		532.3		111		60,701		546.9		(17)	%		(19)	%		(3)	%
Florida		311		118,696		381.7		266		119,305		448.5		17	%		(1)	%		(15)	%
East		455		190,315		418.3		469		225,166		480.1		(3)	%		(15)	%		(13)	%
Total		3,159	$	1,602,492	$	507.3		2,884	$	1,381,649	$	479.1		10	%		16	%		6	%

At December 31, 2017, we had 3,159 homes in backlog with a total value of $1.60 billion, representing respective increases of 275 homes and $220.8 million from December 31, 2016. The year-over-year changes in each market’s homes in backlog and average selling price are correlated with the year-over-year changes in net new orders with the exception of Colorado and California. Colorado was impacted by the joist issue that delayed the construction of certain of our homes and impacted our ability to close backlog, while California had a substantial year-over-year increase in the number of net new orders during the 2017 fourth quarter.

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Homes Completed or Under Construction:

	December 31,
	2017		2016		% Change
Unsold:
Completed		95		115		(17)	%
Under construction		215		279		(23)	%
Total unsold started homes		310		394		(21)	%
Sold homes under construction or completed		2,345		2,186		7	%
Model homes under construction or completed		338		302		12	%
Total homes completed or under construction		2,993		2,882		4	%

Nearly three years ago, we increased our focus on build-to-order homes and limited the number of unsold homes that we start without a sales contract, giving our customers the best opportunity to personalize their homes. As a result, our supply of unsold homes has declined by 21% year-over-year from December 31, 2016. The decline in unsold homes was more than offset by an increase in model homes and sold homes under construction.

Lots Owned and Optioned (including homes completed or under construction):

	December 31, 2017						December 31, 2016
	Lots Owned		Lots Optioned		Total		Lots Owned		Lots Optioned		Total		Total % Change
Arizona		2,003		700		2,703		1,521		287		1,808		50	%
California		1,785		678		2,463		1,702		298		2,000		23	%
Nevada		2,284		561		2,845		1,934		65		1,999		42	%
Washington		535		162		697		862		-		862		(19)	%
West		6,607		2,101		8,708		6,019		650		6,669		31	%
Colorado		4,496		2,736		7,232		3,982		1,683		5,665		28	%
Utah		409		194		603		306		30		336		79	%
Mountain		4,905		2,930		7,835		4,288		1,713		6,001		31	%
Maryland		88		79		167		221		62		283		(41)	%
Virginia		220		45		265		367		19		386		(31)	%
Florida		1,178		1,159		2,337		910		421		1,331		76	%
East		1,486		1,283		2,769		1,498		502		2,000		38	%
Total		12,998		6,314		19,312		11,805		2,865		14,670		32	%

Our total owned and optioned lots at December 31, 2017 were 19,312, up 32% from December 31, 2016, due to substantial growth in our optioned lots as a result of our significant land acquisition approval activity over the past twelve months. The declines in lots controlled in our Maryland and Virginia markets are primarily due to reductions in land acquisition activity over the past two years as our recent returns in these markets have been lower than returns we expect to realize. Though our lots controlled count is down year-over-year in Washington, we remain committed to that market and continue to pursue all land acquisition opportunities as they arise. We believe that our total lot supply of approximately 3.5 years (which is based on our last twelve months deliveries and is consistent with our stated strategic range), coupled with our planned acquisition activity, can support growth in future periods. See "Forward-Looking Statements" above.

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Financial Services

	Year Ended December 31,
			Change							Change
	2017		Amount		%			2016		Amount			%			2015
	(Dollars in thousands)
Financial services revenues
Mortgage operations	$	48,841	$	7,256		17	%	$	41,585	$	11,309			37	%	$	30,276
Other		25,531		3,125		14	%		22,406		3,872			21	%		18,534
Total financial services revenues	$	74,372	$	10,381		16	%	$	63,991	$	15,181			31	%	$	48,810

Financial services pretax income
Mortgage operations	$	28,628	$	4,783		20	%	$	23,845	$	6,615			38	%	$	17,230
Other		15,165		2,607		21	%		12,558		(1,195	)		(9)	%		13,753
Total financial services pretax income	$	43,793	$	7,390		20	%	$	36,403	$