NVR INC - Quarter Report: 2007 June (Form 10-Q)

NVR, Inc.
Condensed Consolidated Balance Sheets (Continued)
(in thousands, except share and per share data)

		June 30, 2007				December 31, 2006
		(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Homebuilding:
Accounts payable		$	272,688			$	273,936
Accrued expenses and other liabilities			200,273				225,178
Liabilities related to assets not owned, consolidated per FIN 46R			172,054				244,805
Obligations under incentive plans			30,585				40,045
Customer deposits			195,165				165,354
Other term debt			2,954				3,080
Senior notes			200,000				200,000
			1,073,719				1,152,398
Mortgage Banking:
Accounts payable and other liabilities			13,818				15,784
Note payable			136,124				153,552
			149,942				169,336
Total liabilities			1,223,661				1,321,734
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,592,640 shares issued as of both June 30, 2007 and December 31, 2006			206				206
Additional paid-in-capital			676,003				585,438
Deferred compensation trust – 516,004 and 547,911 shares of NVR, Inc. common stock as of June 30, 2007 and December 31, 2006, respectively			(75,599	)			(80,491	)
Deferred compensation liability			75,599				80,491
Retained earnings			3,371,608				3,196,040
Less treasury stock at cost – 14,984,212 and 15,075,113 shares at June 30, 2007 and December 31, 2006, respectively			(2,768,197	)			(2,629,610	)
Total shareholders’ equity			1,279,620				1,152,074
Total liabilities and shareholders’ equity		$	2,503,281			$	2,473,808

See notes to condensed consolidated financial statements.

NVR, Inc.
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Homebuilding:
Revenues		$	1,297,140			$	1,722,797			$	2,372,250			$	2,906,539
Other income			5,251				2,634				12,216				5,010
Cost of sales			(1,061,937	)			(1,304,183	)			(1,915,347	)			(2,165,222	)
Selling, general and administrative			(101,198	)			(119,551	)			(198,604	)			(233,557	)
Operating income			139,256				301,697				270,515				512,770
Interest expense			(3,298	)			(6,105	)			(6,620	)			(11,632	)
Homebuilding income			135,958				295,592				263,895				501,138
Mortgage Banking:
Mortgage banking fees			19,528				26,131				37,607				47,044
Interest income			1,030				1,791				2,337				3,250
Other income			276				383				460				614
General and administrative			(8,954	)			(9,852	)			(18,277	)			(19,020	)
Interest expense			(161	)			(967	)			(313	)			(1,921	)
Mortgage banking income			11,719				17,486				21,814				29,967
Income before taxes			147,677				313,078				285,709				531,105
Income tax expense			(56,930	)			(122,726	)			(110,141	)			(208,193	)
Net income		$	90,747			$	190,352			$	175,568			$	322,912
Basic earnings per share		$	16.19			$	33.27			$	31.16			$	57.06
Diluted earnings per share		$	14.14			$	28.08			$	27.11			$	47.54
Basic average shares outstanding			5,606				5,722				5,634				5,659
Diluted average shares outstanding			6,420				6,779				6,477				6,792

See notes to condensed consolidated financial statements.

NVR, Inc.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

		Six Months Ended June 30,
		2007				2006
Cash flows from operating activities:
Net income		$	175,568			$	322,912
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			8,632				6,322
Contract land deposit impairments and write-offs			67,239				32,932
Stock option compensation expense			28,509				27,156
Excess income tax benefit from exercise of stock options			(66,659	)			(79,162	)
Mortgage loans closed			(1,076,375	)			(1,238,425	)
Proceeds from sales of mortgage loans			1,118,579				1,261,263
Principal payments on mortgage loans held for sale			4,745				5,642
Gain on sale of loans			(27,402	)			(34,802	)
Net change in assets and liabilities:
Increase in inventories			(152,946	)			(224,054	)
(Increase) decrease in receivables			(63	)			21,499
Decrease (increase) in contract land deposits			12,383				(38,103	)
Increase in accounts payable, customer deposits and accrued expenses			65,591				125,262
Decrease in obligations under incentive plans			(9,460	)			(26,266	)
Other, net			(33,474	)			(35,346	)
Net cash provided by operating activities			114,867				126,830
Cash flows from investing activities:
Purchase of property, plant and equipment			(4,078	)			(9,952	)
Other, net			1,259				340
Net cash used in investing activities			(2,819	)			(9,612	)
Cash flows from financing activities:
Net repayments under notes payable and other term debt			(17,554	)			(91,753	)
Purchase of treasury stock			(209,613	)			(120,817	)
Excess income tax benefit from exercise of stock options			66,659				79,162
Proceeds from exercise of stock options			66,423				14,632
Net cash used by financing activities			(94,085	)			(118,776	)
Net increase (decrease) in cash and cash equivalents			17,963				(1,558	)
Cash and cash equivalents, beginning of the period			556,119				177,526
Cash and cash equivalents, end of period		$	574,082			$	175,968
Supplemental disclosures of cash flow information:
Interest paid during the period		$	6,356			$	13,344
Income taxes paid, net of refunds		$	66,497			$	170,141
Supplemental disclosures of non-cash activities:
Net assets not owned, consolidated per FIN 46R		$	(4,422	)		$	(945	)

See notes to condensed consolidated financial statements.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

1. Basis of Presentation

     The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see note 2 to the condensed consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America, they should be read in conjunction with the financial statements and notes thereto included in the Company’s 2006 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

     For the three and six-month periods ended June 30, 2007 and 2006, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying financial statements. Prior year segment reporting amounts have been reclassified to conform to 2007 presentation.

2. Consolidation of Variable Interest Entities

     Revised Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (“FIN 46R”), Consolidation of Variable Interest Entities, requires the primary beneficiary of a variable interest entity to consolidate that entity on its financial statements. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity. Expected losses are the expected negative variability in the fair value of an entity’s net assets, exclusive of its variable interests, and expected residual returns are the expected positive variability in the fair value of an entity’s net assets, exclusive of its variable interests. As discussed below, NVR evaluates the provisions of FIN 46R as it relates to NVR’s finished lot acquisition strategy.

     NVR does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under fixed price purchase agreements. The purchase agreements require deposits that may be forfeited if NVR fails to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots. As of June 30, 2007, the Company controlled approximately 84,600 lots with deposits in cash and letters of credit totaling approximately $450,000 and $11,000, respectively.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     The Company believes that this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. NVR may, at its option, choose for any reason and at any time not to perform under these purchase agreements by delivering notice of its intent not to acquire the finished lots under contract. NVR’s sole legal obligation and economic loss for failure to perform under these purchase agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the purchase agreements. In other words, if NVR does not perform under a purchase agreement, NVR loses only its deposit. NVR does not have any financial or specific performance guarantees, or completion obligations, under these purchase agreements. None of the creditors of any of the development entities with which NVR enters fixed price purchase agreements have recourse to the general credit of NVR. Except as described below, NVR also does not share in an allocation of either the profit earned or loss incurred by any of these entities with which NVR enters fixed price purchase agreements.

     On a very limited basis, NVR also obtains finished lots using joint venture limited liability corporations (“LLC’s”). All LLC’s are structured such that NVR is a non-controlling member and is at risk only for the amount invested by the Company. NVR is not a borrower, guarantor or obligor on any of the LLCs’ debt. NVR enters into a standard fixed price purchase agreement to purchase lots from the LLC’s.

     At June 30, 2007, NVR had an aggregate investment in twelve separate LLC’s totaling approximately $13,000, which controlled approximately 700 lots. NVR recognizes its share of the earnings of the LLC’s as an adjustment of the cost basis of the lots at the time that the lot and related home is settled with an external customer. During the six months ended June 30, 2007 and 2006, NVR adjusted cost of sales by approximately $270 and $70, respectively, which represented NVR’s share of the earnings of the LLC’s.

     Forward contracts, such as the fixed price purchase agreements utilized by NVR to acquire finished lot inventory, are deemed to be “variable interests” under FIN 46R. Therefore, the development entities with which NVR enters fixed price purchase agreements, including the LLC’s, are examined under FIN 46R for possible consolidation by NVR of such development entities on NVR’s financial statements. NVR has developed a methodology to determine whether it, or conversely, the owner(s) of the applicable development entity is the primary beneficiary of a development entity. The methodology used to evaluate NVR’s primary beneficiary status requires substantial management judgment and estimation. These judgments and estimates involve assigning probabilities to various estimated cash flow possibilities relative to the development entity’s expected profits and losses and the cash flows associated with changes in the fair value of finished lots under contract. Although management believes that its accounting policy is designed to properly assess NVR’s primary beneficiary status relative to its involvement with the development entities from which NVR acquires finished lots, changes to the probabilities and the cash flow possibilities used in NVR’s evaluation could produce widely different conclusions regarding whether NVR is or is not a development entity’s primary beneficiary.

     The Company has evaluated all of its fixed price purchase agreements and LLC arrangements and has determined that it is the primary beneficiary of thirty-two of those development entities with which the agreements and arrangements are held. As a result, at June 30, 2007, NVR has consolidated such development entities in the accompanying condensed consolidated balance sheet. Where NVR deemed itself to be the primary beneficiary of a development entity created after December 31, 2003 and the development entity refused to provide financial statements to NVR, NVR utilized estimation techniques to perform the consolidation. The effect of the consolidation under FIN 46R at June 30, 2007 was the inclusion on the balance sheet of $199,246 as Assets not owned, consolidated per FIN 46R, with a corresponding inclusion of $172,054 as Liabilities related to assets not owned, consolidated per FIN 46R, after elimination of intercompany items. Inclusive in these totals were assets of approximately $46,000 and liabilities of approximately $41,000 estimated for ten development entities created after December 31, 2003 that did not provide financial statements.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Following is the consolidating schedule at June 30, 2007:

		NVR, Inc.
		and				FIN 46R								Consolidated
		Subsidiaries				Entities				Eliminations				Total
ASSETS
Homebuilding:
Cash and cash equivalents		$	571,522			$	—			$	—			$	571,522
Receivables			13,474				—				—				13,474
Homebuilding inventory			886,562				—				—				886,562
Property, plant and equipment, net			35,798				—				—				35,798
Reorganization value in excess of amount allocable to identifiable assets, net			41,580				—				—				41,580
Goodwill and intangibles, net			11,849				—				—				11,849
Contract land deposits, net			345,170				—				(18,155	)			327,015
Other assets			249,342				—				(9,037	)			240,305
			2,155,297				—				(27,192	)			2,128,105
Mortgage banking assets:			175,930				—				—				175,930
FIN 46R Entities:
Land under development			—				192,068				—				192,068
Other assets			—				7,178				—				7,178
			—				199,246				—				199,246
Total assets		$	2,331,227			$	199,246			$	(27,192	)		$	2,503,281
LIABILITIES AND SHAREHOLDERS’ EQUITY
Homebuilding:
Accounts payable, accrued expenses and other liabilities		$	503,546			$	—			$	—			$	503,546
Customer deposits			195,165				—				—				195,165
Other term debt			2,954				—				—				2,954
Senior notes			200,000				—				—				200,000
			901,665				—				—				901,665
Mortgage banking liabilities:			149,942				—				—				149,942
FIN 46R Entities:
Accounts payable, accrued expenses and other liabilities			—				15,197				—				15,197
Debt			—				97,542				—				97,542
Contract land deposits			—				25,834				(25,834	)			—
Advances from NVR, Inc.			—				7,865				(7,865	)			—
Minority interest			—				—				59,315				59,315
			—				146,438				25,616				172,054
Equity			1,279,620				52,808				(52,808	)			1,279,620
Total liabilities and shareholders’ equity		$	2,331,227			$	199,246			$	(27,192	)		$	2,503,281

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     Under FIN 46R, an enterprise with an interest in a variable interest entity or potential variable interest entity created before December 31, 2003, is not required to apply FIN 46R to that entity if the enterprise, after making an “exhaustive effort”, is unable to obtain the information necessary to perform the accounting required to consolidate the variable interest entity for which it is determined to be the primary beneficiary. At June 30, 2007, NVR has been unable to obtain the information necessary to perform the accounting required to consolidate eight separate development entities created before December 31, 2003 for which NVR determined it was the primary beneficiary. NVR has made, or has committed to make, aggregate deposits, totaling approximately $9,300 to these eight separate development entities, with a total aggregate purchase price for the finished lots of approximately $80,000. The aggregate deposit made or committed to being made is NVR’s maximum exposure to loss. As noted above, because NVR does not have any contractual or ownership interests in the development entities with which it contracts to buy finished lots (other than the limited use of the LLC’s as discussed above), NVR does not have the ability to compel these development entities to provide financial or other data to NVR. Because NVR has no ownership rights in any of these eight development entities, the consolidation of such entities has no impact on NVR’s net income or earnings per share for the three and six months ended June 30, 2007. Aggregate activity with respect to the eight development entities is included in the following table:

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Finished lots purchased — dollars		$	5,665			$	3,717			$	9,862			$	5,773
Finished lots purchased — units			35				28				58				52

3. Contract Land Deposits

     During the three and six month periods ended June 30, 2007, the Company incurred pre-tax impairment charges of approximately $55,000 and $67,000, respectively. During the three and six month periods ended June 30, 2006, the Company incurred pre-tax impairment charges of approximately $26,000 and $33,000, respectively. These charges are related to the impairment of contract land deposits due to deteriorating market conditions in the homebuilding industry. These impairment charges were recorded in cost of sales on the accompanying condensed, consolidated statements of income. The contract land deposit asset is shown net of a $104,468 and $59,636 impairment valuation allowance at June 30, 2007 and December 31, 2006, respectively.

4. Earnings per Share

     The following weighted average shares and share equivalents are used to calculate basic and diluted earnings per share for the three and six months ended June 30, 2007 and 2006:

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Basic weighted average number of shares outstanding			5,606,000				5,722,000				5,634,000				5,659,000
Shares issuable upon exercise of dilutive options			814,000				1,057,000				843,000				1,133,000
Diluted average number of shares outstanding			6,420,000				6,779,000				6,477,000				6,792,000

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     The assumed proceeds used in the treasury method for calculating NVR’s diluted earnings per share includes the amount the employee must pay upon exercise, the amount of compensation cost attributed to future services and not yet recognized, and the amount of tax benefits that would be credited to additional paid-in capital assuming exercise of the option. The assumed amount credited to additional paid-in capital equals the tax benefit from assumed exercise after consideration of the intrinsic value upon assumed exercise less the actual stock-based compensation expense to be recognized in the income statement from 2006 and future periods.

     Options to purchase 34,238 shares of common stock during both the three and six months ended June 30, 2007, and options to purchase 64,177 and 58,427 shares of common stock during the three and six months ended June 30, 2006, were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive. In addition, 408,737 performance-based options were outstanding during the period ended June 30, 2007 and 419,425 performance-based options during the period ended June 30, 2006, have been excluded from the computation of diluted earnings per share because the performance target had not been achieved, pursuant to the requirements of Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share.

5. Excess Reorganization Value, Goodwill and Other Intangibles

     SFAS No. 142, Goodwill and Other Intangible Assets, requires goodwill and reorganization value in excess of amounts allocable to identifiable assets (“excess reorganization value”) to be tested for impairment on an annual basis subsequent to the year of adoption. The Company completed the annual assessment of impairment during the first quarter of 2007, and as of June 30, 2007, management believes that goodwill, indefinite life intangibles, and excess reorganization value were not impaired.

6. Uncertainty in Income Taxes

     In June 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return.

     The Company’s adoption of FIN 48 on January 1, 2007 did not require a cumulative adjustment to retained earnings to comply with the recognition provisions of FIN 48. As of January 1, 2007, the Company has approximately $34,200 of unrecognized tax benefits, all of which would decrease income tax expense if recognized. The Company recognizes accrued interest related to unrecognized tax benefits as a component of income tax expense. As of January 1, 2007, the Company has accrued approximately $7,600 of interest expense. In accordance with the Company’s accounting policy, penalties are not accrued unless the position does not meet the minimum statutory requirements, but if incurred, would be recorded as a component of income tax expense. The Company’s federal income tax returns for 2003 through 2006 are open tax years. The Company files in various state and local jurisdictions, with varying statutes of limitation.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

7. Shareholders’ Equity

     A summary of changes in shareholders’ equity is presented below:

						Additional												Deferred				Deferred
		Common				Paid-In				Retained				Treasury				Comp.				Comp.
		Stock				Capital				Earnings				Stock				Trust				Liability				Total
Balance, December 31, 2006		$	206			$	585,438			$	3,196,040			$	(2,629,610	)		$	(80,491	)		$	80,491			$	1,152,074
Net income			—				—				175,568				—				—				—				175,568
Deferred compensation activity			—				—				—				—				4,892				(4,892	)			—
Purchase of common stock for treasury			—				—				—				(209,613	)			—				—				(209,613	)
Stock-based compensation			—				28,509				—				—				—				—				28,509
Stock option activity			—				66,423				—				—				—				—				66,423
Tax benefit from stock-based compensation activity			—				66,659				—				—				—				—				66,659
Treasury shares issued upon option exercise			—				(71,026	)			—				71,026				—				—				—
Balance, June 30, 2007		$	206			$	676,003			$	3,371,608			$	(2,768,197	)		$	(75,599	)		$	75,599			$	1,279,620

     The Company repurchased approximately 306,000 shares of its common stock during the six months ended June 30, 2007. The Company settles option exercises by issuing shares of treasury stock to option holders. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired. During the three and six month periods ended June 30, 2007, approximately 116,000 and 397,000 options to purchase shares of the Company’s common stock were exercised, respectively.

8. Product Warranties

     The Company establishes warranty and product liability reserves to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our general counsel and outside counsel retained to handle specific product liability cases. The following table reflects the changes in the Company’s warranty reserve during the three and six months ended June 30, 2007 and 2006:

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Warranty reserve, beginning of period		$	68,328			$	61,566			$	70,175			$	60,112
Provision			10,300				15,040				18,540				25,326
Payments			(11,854	)			(11,341	)			(21,941	)			(20,173	)
Warranty reserve, end of period		$	66,774			$	65,265			$	66,774			$	65,265

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

9. Segment Disclosures

     Consistent with the principles and objectives of SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, the following disclosure includes four homebuilding reportable segments that aggregate geographically the Company’s homebuilding operating segments, and the mortgage banking operations presented as a single reportable segment. The homebuilding reportable segments are comprised of operating divisions in the following geographic areas:

Homebuilding Mid Atlantic - Virginia, West Virginia, Maryland, and Delaware
Homebuilding North East - New Jersey and eastern Pennsylvania
Homebuilding Mid East - Kentucky, Michigan, New York, Ohio, and western Pennsylvania
Homebuilding South East - North Carolina, South Carolina and Tennessee

     Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the periods presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital. The Company records charges on contract land deposits when it determines that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the determination to terminate a fixed price purchase agreement with the developer or when NVR forfeits some or all of the deposit upon restructuring a fixed price purchase agreement. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a capital allocation.

     In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead, consolidation adjustments, stock option compensation expense, and external corporate interest. NVR’s overhead functions, such as accounting, treasury, human resources, land acquisition, etc., are centrally performed and the costs of which are not allocated to the Company’s operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to the Company’s operating segments. Likewise, stock option compensation expenses are also not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on the Company’s outstanding Senior Notes and working capital line borrowings, and are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

     Following are tables presenting revenues, segment profit and segment assets for each reportable segment, with reconciliations to the amounts reported for the consolidated enterprise, where applicable:

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Revenues:
Homebuilding Mid Atlantic		$	789,878			$	1,109,980			$	1,478,661			$	1,894,388
Homebuilding North East			114,705				172,870				203,328				292,541
Homebuilding Mid East			224,489				277,495				379,617				444,309
Homebuilding South East			168,068				162,452				310,644				275,301
Mortgage Banking			19,528				26,131				37,607				47,044
Consolidated revenues		$	1,316,668			$	1,748,928			$	2,409,857			$	2,953,583

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Profit:
Homebuilding Mid Atlantic		$	115,291			$	259,977			$	218,660			$	447,484
Homebuilding North East			4,583				21,613				8,008				31,390
Homebuilding Mid East			21,862				23,240				35,874				30,096
Homebuilding South East			25,437				23,910				48,164				38,344
Mortgage Banking			12,604				18,350				23,584				31,693
Segment profit			179,777				347,090				334,290				579,007
Contract land deposit impairments			(39,115	)			(22,357	)			(47,605	)			(29,237	)
Stock option expense			(14,186	)			(13,596	)			(28,509	)			(27,156	)
Corporate capital allocation			38,766				48,643				74,229				90,230
Unallocated corporate overhead			(20,288	)			(26,978	)			(46,271	)			(61,462	)
Consolidation adjustments and other			5,850				(13,486	)			5,837				(8,722	)
Corporate interest expense			(3,127	)			(6,238	)			(6,262	)			(11,555	)
Reconciling items sub-total			(32,100	)			(34,012	)			(48,581	)			(47,902	)
Consolidated income before taxes		$	147,677			$	313,078			$	285,709			$	531,105

		June 30,
		2007				2006
Assets:
Homebuilding Mid Atlantic		$	949,937			$	1,190,534
Homebuilding North East			131,106				180,311
Homebuilding Mid East			176,728				202,677
Homebuilding South East			129,145				124,631
Mortgage Banking			168,583				207,730
Segment assets			1,555,499				1,905,883
Assets not owned, consolidated per Fin 46R			199,246				262,184
Cash			571,522				172,845
Deferred taxes			192,697				127,811
Intangible assets			60,776				60,925
Land reserve			(104,468	)			(51,769	)
Consolidation adjustments and other			28,009				49,947
Reconciling items sub-total			947,782				621,943
Consolidated assets		$	2,503,281			$	2,527,826

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

10. Commitments and Contingencies

     On July 18, 2007, former employees filed lawsuits against the Company in the Court of Common Pleas in Allegheny County, Pennsylvania and Hamilton County, Ohio and in Superior Court in Durham County, North Carolina alleging that the Company incorrectly classified its sales and marketing representatives as being exempt from overtime wages. These lawsuits are similar in nature to another lawsuit filed on October 29, 2004 by another former employee in the United States District Court for the Western District of New York. The complaints seek injunctive relief, an award of unpaid wages, including fringe benefits, liquidated damages equal to the overtime wages allegedly due and not paid, attorney and other fees and interest. The suits were filed as purported class action. The class of individuals that any of the lawsuits purport to represent has not been certified. The Company intends to vigorously defend these actions, as the Company believes that its compensation practices in regard to sales and marketing representatives are entirely lawful. NVR’s position is strongly supported by two letter rulings that the United States Department of Labor issued in January 2007, in accordance with the DOL’s mandate to interpret federal wage and hour laws. The two courts to most recently consider similar claims against homebuilders have adopted the DOL’s position that the sales and marketing representatives were properly classified as exempt from overtime wages. Because we are unable to determine the likelihood of an unfavorable outcome of this case, or the amount of damages, if any, the Company has not recorded any associated liabilities in the accompanying condensed, consolidated balance sheet.

     On April 16, 2007, a lawsuit was filed by one of NVR’s customers against the Company in the United States District Court, Western District of Pennsylvania. The plaintiffs allege that the Company violated Section 8 of the Real Estate Settlement and Protection Act. The complaint seeks treble damages, interest, injunctive and declaratory relief, attorney fees and other expenses. The lawsuit was filed as a purported class action. The court has not certified the class of individuals that the lawsuit purports to represent. Similar lawsuits have been filed against at least two other homebuilders operating in Pennsylvania. The Company intends to vigorously defend this action. However, at this time, the Company is unable to express an opinion as to the likelihood of an unfavorable outcome, or the amount of damages, if any. Accordingly, the Company has not recorded any associated liabilities in the accompanying condensed, consolidated balance sheet.

     The Company is involved in various other claims and litigation arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on the Company’s financial condition or results of operations.

11. Recent Accounting Pronouncements

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 provides guidance for using fair value to measure assets and liabilities and expands disclosures about fair value measurements. SFAS No. 157 will be effective for the Company’s fiscal year beginning January 1, 2008. The Company is currently reviewing the effect, if any, SFAS No. 157 will have on its financial statements upon adoption.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands except per share data)

     In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, which provides an approach to simplify efforts to obtain hedge-like (offset) accounting by allowing the Company the option to carry mortgage servicing rights at fair value. This new Statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a replacement of FASB SFAS No. 125, with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 became effective for all separately recognized servicing assets and liabilities as of the beginning of the current fiscal year. Because the Company does not retain the servicing rights when it sells its mortgage loans held for sale, the adoption of SFAS No. 156 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

     On November 29, 2006, the FASB ratified Emerging Issue Task Force (“EITF”) Issue No. 06-8, Applicability of the Assessment of a Buyer’s Continuing Investment Under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums. EITF No. 06-8 states that the adequacy of the buyer’s continuing investment under SFAS No. 66 should be assessed in determining whether to recognize profit under the percentage-of-completion method on the sale of individual units in a condominium project. This consensus could require that additional deposits be collected by developers of condominium projects that want to recognize profit during the construction period under the percentage-of-completion method. EITF No. 06-8 is effective for the Company beginning on January 1, 2008. The Company does not expect that the adoption of EITF No. 06-8 will have a material impact on its consolidated financial position, results of operations or cash flows.

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollars in thousands)

Forward-Looking Statements

     Some of the statements in this Form 10-Q, as well as statements made by NVR in periodic press releases and other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereof or comparable terminology, or by discussion of strategies, each of which involves risks and uncertainties. All statements other than those of historical facts included herein, including those regarding market trends, NVR’s financial position, business strategy, the outcome of pending litigation, projected plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of NVR to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, general economic and business conditions (on both a national and regional level), interest rate changes, access to suitable financing, competition, the availability and cost of land and other raw materials used by NVR in its homebuilding operations, shortages of labor, weather related slow downs, building moratoria, governmental regulation, the ability of NVR to integrate any acquired business, fluctuation and volatility of stock and other financial markets, mortgage financing availability and other factors over which NVR has little or no control. NVR undertakes no obligation to update such forward-looking statements. For additional information regarding risk factors, see Part II, Item 1(a) of this Report.

     Unless the context otherwise requires, references to “NVR”, “we”, “us” or “our” include NVR and its subsidiaries.

Results of Operations for the Three and Six Months Ended June 30, 2007 and 2006

Overview

Our Business

     Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings. To more fully serve our homebuilding customers, we also operate a mortgage banking and title services business. Our homebuilding reportable segments consist of the following markets:

		Mid Atlantic:		Maryland, Virginia, West Virginia and Delaware
		North East:		New Jersey and eastern Pennsylvania
		Mid East:		Kentucky, Michigan, New York, Ohio and western Pennsylvania
		South East:		North Carolina, South Carolina, and Tennessee

     We believe that we operate our business with a conservative operating strategy. We do not engage in land development and primarily construct homes on a pre-sold basis. This strategy allows us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital. In addition, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets which management believes contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets.

     Because we are not active in the land development business, our continued success is contingent upon, among other things, our ability to control an adequate supply of finished lots at current market prices on which to build, and on our developers’ ability to timely deliver finished lots to meet the sales demands of our customers. We acquire finished lots from various development entities under fixed price purchase agreements (“purchase agreements”). These purchase agreements require deposits in the form of cash or letters of credit that may be forfeited if we fail to perform under the purchase agreement. However, we believe this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and development. As of June 30, 2007, we controlled approximately 84,600 lots with deposits in cash and letters of credit totaling approximately $450,000 and $11,000, respectively, and an additional 700 lots through joint venture limited liability corporations. Included in the number of controlled lots are approximately 13,000 lots for which we have recorded a land contract deposit impairment reserve of approximately $104,000 as of June 30, 2007 (see note 3 for further discussion of contract land deposits).

Current Overview of the Business Environment

     The current home sales environment remains challenging, still characterized by high levels of existing and new homes available for sale, declining homebuyer confidence and affordability issues, and a more restrictive mortgage lending environment resulting from recent changes in the secondary mortgage markets related to sub-prime mortgage programs. The current market conditions continue to exert a depressed effect on new orders and on selling prices. In response, we continue to offer incentives to homebuyers and to reduce prices in many of our markets. As a result of these market conditions, we experienced a decline in new orders in each of our market segments. Overall, for the second quarter of 2007, new orders decreased 11% compared to the second quarter of 2006. Year to date new orders for 2007 decreased 2% compared to the same period in 2006. Our cancellation rate for the second quarter of 2007 was 16% as compared to 13% during the same period in 2006 and 16% in the first quarter of 2007. The cancellation rate was highest in our Washington sub-market at approximately 21%, which is consistent with the cancellation rates for both the second quarter of 2006 and the first quarter of 2007 of 21% and 22%, respectively. Selling prices for the quarter and year to date periods ended June 30, 2007 decreased by 5% from the same respective periods in 2006. Average sales prices were down in each of our market segments during both the quarter and year to date periods as compared to the same periods in 2006, except for the South East market where average sales prices were up 11% and 15% for the quarter and year to date periods, respectively.

     The Company is actively involved in implementing strategic steps to address this challenging homebuilding market. We continue to work with our developers in certain communities to reduce lot prices to current market values and/or to defer scheduled lot purchases to coincide with our slower than expected sales pace. In communities where we are unsuccessful in negotiating necessary adjustments to the contracts to meet current market prices, we may exit the community and forfeit our deposit. During the quarter ended June 30, 2007, we recorded contract land deposit impairment charges of approximately $55,000 as compared to approximately $26,000 in the second quarter of 2006. Our year to date contract land deposit impairment charges for 2007 and 2006 were $67,000 and $33,000, respectively. As noted above, as of June 30, 2007 we had a reserve of approximately $104,000 on outstanding contract land deposits related to approximately 13,000 lots. These lots are included in the total number of lots controlled mentioned above. As a result of the termination of certain purchase agreements and a reduced pace of entering into new lot option contracts due to land market value uncertainties, we have seen a 16% reduction in the average number of active communities in which we are selling to 516 communities in the second quarter of 2007 from 618 communities in the same period of 2006.

     For the quarter ended June 30, 2007, consolidated revenues decreased approximately 25% from the same period in 2006. Additionally, net income and diluted earnings per share in the current quarter decreased 52% and 50%, respectively, as compared to the second quarter of 2006. Gross profit margins within our homebuilding business declined to 18.1% in the second quarter of 2007 as compared to 24.3% in the second quarter of 2006. Gross profit margins have been negatively impacted by the pricing pressures created by market conditions, which began to erode in the second half of 2005 and have remained challenging. Additionally, gross profit margins have been negatively impacted by the contract land deposit impairment charges discussed above. Year to date consolidated revenues, net income and diluted earnings per share declined 18%, 46% and 43%, respectively. Based on the current uncertainty in the market, we expect to continue to see downward pricing pressures and in turn, continued pressure on gross profit margins in future periods. To offset these declining selling prices and customer affordability issues, we are aggressively working with our vendors to reduce material and labor costs incurred in the construction process. Additionally, in certain of our markets, we are providing house types at lower sales price points by reducing the square footage of the products offered and by providing fewer upgraded options as standard options. This provides homebuyers with a more affordable product and the option to upgrade only those features important to each particular buyer. We are also taking steps to reduce our exposure to sub-prime loans which represented approximately 6% of our mortgage dollar volume in the current quarter. In addition, we made staffing reductions in 2006 to size our organization to meet sales activity levels expected for 2007. In 2007, we will continue to assess our staffing levels and organizational structure as conditions warrant.

Homebuilding Operations

     The following table summarizes the results of operations and other data for the consolidated homebuilding operations:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Revenues		$	1,297,140			$	1,722,797			$	2,372,250			$	2,906,539
Cost of Sales		$	1,061,937			$	1,304,183			$	1,915,347			$	2,165,222
Gross profit margin percentage			18.1	%			24.3	%			19.3	%			25.5	%
Selling, general and administrative		$	101,198			$	119,551			$	198,604			$	233,557
Settlements (units)			3,463				4,297				6,163				7,283
Average settlement price		$	374.2			$	400.3			$	384.4			$	398.5
New orders (units)			3,745				4,204				7,662				7,837
Average new order price		$	363.9			$	384.7			$	368.2			$	386.0
Backlog (units)											7,887				8,864
Average backlog price										$	391.3			$	428.5

Consolidated Homebuilding – Three Months Ended June 30, 2007 and 2006

     Homebuilding revenues decreased 25% for the second quarter of 2007 compared to the same period in 2006 as a result of a 19% decrease in the number of units settled and a 7% decrease in the average settlement price quarter over quarter. The decrease in the number of units settled is primarily attributable to our beginning backlog units being approximately 15% lower at the start of the second quarter of 2007 as compared to the same period of 2006 coupled with a lower backlog turnover rate quarter over quarter. Average settlement prices were primarily impacted by a 9% lower average price of homes in backlog entering the second quarter of 2007 as compared to the same period in 2006.

     Gross profit margins in the quarter ended June 30, 2007 declined 620 basis points as compared to the second quarter of 2006 primarily as a result of the increased pressure on selling prices and higher contract land deposit impairment charges of $55,000 as compared to $26,000 in the second quarter of 2006. Additionally, to a lesser extent, gross profit margins were also negatively impacted by higher lot and certain commodity costs. We expect continued gross profit margin pressure over at least the next several quarters due to the current market conditions discussed above.

     New order units and the average selling price for the second quarter of 2007 decreased by 11% and 5%, respectively, from the second quarter of 2006. We experienced unit declines in each of our market segments. The average selling price was also down in each of our market segments except for the South East segment where the average price of new orders was up 11%. The cancellation rate for the second quarter of 2007 was 16% compared to 13% in the same period in 2006 and 16% in the first quarter of 2007. We expect new orders to be negatively impacted in future quarters as the market remains challenging. Affordability issues continue to impact many of our markets, which may be further impacted by the deterioration of the sub-prime mortgage market.

     Selling, general and administrative (“SG&A”) expenses for the second quarter decreased by approximately $18,400, but as a percentage of revenue increased to 7.8% from 6.9% in the second quarter of 2006. The decrease in SG&A expenses is primarily attributable to a $12,100 decrease in personnel costs as staffing levels were reduced to meet current and expected levels of sales activity. In addition, marketing costs have decreased approximately $4,200 in the second quarter of 2007 compared to the same period in 2006 due to a 16% decrease in the average number of active communities.

Consolidated Homebuilding –Six Months Ended June 30, 2007 and 2006

     Homebuilding revenues decreased 18% for the six months ended June 30, 2007 compared to the same period in 2006 due to a 15% decrease in the number of units settled and a 4% decrease in the average settlement price. The decrease in the number of units settled is attributable to a 23% lower number of homes in backlog entering 2007 as compared to the same period in 2006, offset partially by a higher backlog turnover rate year over year. The decrease in average settlement prices is attributable to a 7% lower average price of homes in the beginning backlog year over year.

     Gross profit margins in the first six months of 2007 declined compared to the first six months of 2006 primarily as a result of the downward pressure on selling prices experienced during 2006 and 2007, and higher lot and certain commodity costs. Gross profit margins were also negatively impacted by an increase in contract land deposit impairment charges period over period. For the first six months of 2007, we incurred contract land deposit impairment charges of approximately $67,000 as compared to approximately $33,000 for the same period in 2006.

     New orders for the six months ended June 30, 2007 decreased by 2% compared to the same period in 2006. New orders are down in each of our market segments except in the Mid Atlantic which is 3% higher in the 2007 period as compared to the year to date period in 2006. Although new orders in the Mid Atlantic market are higher period over period, we began to experience a noticeable slowdown in market conditions in the Mid Atlantic as the first quarter of 2007 progressed. This slowdown resulted in a decrease in new orders in the Mid Atlantic segment in the second quarter of 2007 compared to the second quarter of 2006. The average sales price of new orders decreased 5% in the six-month period ended June 30, 2007 compared to the same period in 2006. Average sales prices are down in each market segment except the South East market where average sales prices have increased approximately 15% in 2007 as compared to 2006 as a result of a shift in the product mix year over year. We expect new order units and average selling prices to be negatively impacted in future quarters in all of our market segments as the market remains challenging.

     SG&A expenses for the six-month period ended June 30, 2007 decreased approximately $35,000 compared to the same period in 2006, and as a percentage of revenue increased slightly to 8.4% in 2007 compared to 8.0% for the 2006 period. The decrease in SG&A dollars is primarily attributable to a $27,300 decrease in personnel costs as staffing levels were reduced during 2006 to meet current and expected levels of sales activity. In addition, marketing costs have decreased approximately $5,900 in 2007 as compared to the same period in 2006 due to a 13% decrease in the average number of active communities year over year.

     Backlog units and dollars were 7,887 and $3,085,939, respectively, as of June 30, 2007 compared to 8,864 and $3,798,214 as of June 30, 2006. The decrease in backlog units is primarily attributable to our beginning backlog units being approximately 23% lower at the beginning of 2007 as compared to the beginning of 2006. Backlog dollars were negatively impacted by the decrease in backlog units coupled with a 9% decrease in the average price of homes in ending backlog, resulting primarily from a 5% decrease in the average selling price for new orders over the six month period ended June 30, 2007 compared to the same period in 2006. In addition, the average price of homes in the current year’s backlog was also lower due to a shift in product mix from our single family detached product to our single family attached product which generally are lower priced.

Reportable Segments

     Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the periods presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the determination to terminate a purchase agreement with the developer, or when we forfeit some or all of the deposit upon restructuring a purchase agreement. The following table summarizes certain homebuilding operating activity by segment for the three and six months ended June 30, 2007 and 2006:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2007				2006				2007				2006
Mid Atlantic:
Revenues		$	789,878			$	1,109,980			$	1,478,661			$	1,894,388
Settlements (units)			1,720				2,145				3,072				3,720
Average settlement price		$	459.1			$	517.0			$	481.1			$	508.8
New orders (units)			1,803				1,978				3,724				3,612
Average new order price		$	456.3			$	492.8			$	460.5			$	504.7
Backlog (units)											4,317				4,866
Average backlog price										$	479.2			$	538.7
Gross profit margin		$	179,537			$	337,906			$	341,570			$	593,129
Gross profit margin percentage			22.7	%			30.4	%			23.1	%			31.3	%
Segment profit		$	115,291			$	259,977			$	218,660			$	447,484
North East:
Revenues		$	114,705			$	172,870			$	203,328			$	292,541
Settlements (units)			324				454				573				756
Average settlement price		$	353.9			$	380.7			$	354.8			$	386.9
New orders (units)			345				404				762				855
Average new order price		$	344.7			$	388.8			$	342.3			$	372.2
Backlog (units)											729				883
Average backlog price										$	345.1			$	388.5
Gross profit margin		$	16,794			$	36,806			$	31,047			$	59,517
Gross profit margin percentage			14.6	%			21.3	%			15.3	%			20.3	%
Segment profit		$	4,583			$	21,613			$	8,008			$	31,390
Mid East:
Revenues		$	224,489			$	277,495			$	379,617			$	444,309
Settlements (units)			839				1,028				1,411				1,640
Average settlement price		$	266.4			$	268.4			$	267.5			$	269.3
New orders (units)			923				1,079				1,953				2,007
Average new order price		$	245.2			$	270.7			$	251.4			$	268.9
Backlog (units)											1,816				1,968
Average backlog price										$	252.4			$	271.5
Gross profit margin		$	41,571			$	47,506			$	72,172			$	75,124
Gross profit margin percentage			18.5	%			17.1	%			19.0	%			16.9	%
Segment profit		$	21,862			$	23,240			$	35,874			$	30,096
South East:
Revenues		$	168,068			$	162,452			$	310,644			$	275,301
Settlements (units)			580				670				1,107				1,167
Average settlement price		$	289.8			$	242.5			$	280.6			$	235.9
New orders (units)			674				743				1,223				1,363
Average new order price		$	288.8			$	260.0			$	289.7			$	252.8
Backlog (units)											1,025				1,147
Average backlog price										$	299.9			$	261.4
Gross profit margin		$	39,100			$	36,481			$	73,223			$	61,031
Gross profit margin percentage			23.3	%			22.5	%			23.6	%			22.2	%
Segment profit		$	25,437			$	23,910			$	48,164			$	38,344

Mid Atlantic

Three Months Ended June 30, 2007 and 2006

     The Mid Atlantic segment had an approximate $145,000 reduction in segment profit in the three months ended June 30, 2007 compared to the same period in 2006. Revenues decreased 29% for the three months ended June 30, 2007 from the prior year quarter due primarily to a 20% decrease in the number of units settled. The decrease in units settled is attributable to a 16% lower backlog unit balance entering the second quarter of 2007 compared to the same period in 2006, coupled with a lower backlog turnover rate period over period. The Mid Atlantic segment’s gross profit margin percentage for the quarter decreased to 22.7% from 30.4% in the same period in 2006. Gross profit margins were negatively impacted by the increased pressure on selling prices resulting in an 11% decrease in the average settlement price in the second quarter of 2007 as compared to the second quarter of 2006. In addition, gross margins were also negatively impacted by higher contract land deposit impairment charges of approximately $11,000 in the second quarter of 2007 compared to approximately $3,000 in the second quarter of 2006.

     New orders for the second quarter of 2007 decreased 9% from the same period in 2006. We began to experience a noticeable slowdown in market conditions in the Mid Atlantic as the first quarter of 2007 progressed, which has continued into the second quarter. We expect that the markets within this segment will continue to be negatively impacted by high levels of new and existing home inventory for sale, affordability issues, and a tougher lending environment resulting from the sub-prime mortgage market deterioration as discussed above. The segment’s overall average sales price of new orders decreased 7% in the quarter compared to the second quarter of 2006.

Six Months Ended June 30, 2007 and 2006

     The Mid Atlantic segment had an approximate $229,000 decrease in segment profit in the six months ended June 30, 2006 compared to the same period in 2006. Revenues decreased 22% for the six months ended June 30, 2007 from the prior year period on a 17% decrease in the number of units settled and a 5% decrease in the average settlement price. The decrease in units settled is attributable to a 26% lower backlog unit balance at the beginning of the period, offset partially by a higher backlog turnover rate period over period. The decrease in the average settlement price is primarily attributable to an 8% lower average price of homes in the beginning backlog period over period. The segment’s gross profit margin percentage fell to 23.1% in 2007 from 31.3% in 2006. Gross profit margins were adversely affected by the downward pressure on selling prices, higher contract land deposit impairment charges of approximately $15,000 in 2007 compared to approximately $4,000 in 2006, and higher lot and certain commodity costs.

     New orders for the six month period ended June 30, 2007 increased 3% from the same period in 2006. Despite this overall increase in new orders, we began to experience a noticeable slowdown in market conditions in the Mid Atlantic as the first quarter of 2007 progressed. This slowdown continued in to the second quarter of 2007 and resulted in 9% decrease in new orders in the Mid Atlantic segment in the second quarter of 2007 as compared to the second quarter of 2006 as discussed above. We expect market conditions in the Mid Atlantic to remain challenging into future quarters and continue to provide downward pressure on new order sales, pricing and gross profit margins. Backlog units and dollars decreased approximately 11% and 21%, respectively. The decrease in backlog units is attributable to the beginning backlog units being approximately 26% lower at the beginning of 2007 as compared to the beginning of 2006. Backlog dollars were negatively impacted by the decrease in backlog units coupled with an 11% decrease in the average price of homes in ending backlog, resulting from a 9% decrease in the average selling price for new orders over the six month period ended June 30, 2007 compared to the same period in 2006.

North East

Three Months Ended June 30, 2007 and 2006

     The North East segment had an approximate $17,000 decrease in segment profit in the three months ended June 30, 2007 compared to the same period in 2006. Revenues decreased approximately 34% as a result of a 29% decrease in the number of units settled and a 7% decline in the average settlement price. The decrease in units settled is attributable to a 24% lower backlog unit balance entering the second quarter of 2007 compared to the same period in 2006 and to a lower backlog turnover rate quarter over quarter. Average settlement prices were down primarily as a result of selling price pressures in prior quarters, which were reflected in the average price of homes in our backlog balance at the beginning of the second quarter of 2007 being 9% lower than the same period in 2006. Gross profit margins decreased to 14.6% in 2007 from 21.3% in 2006 primarily as a result of the lower average settlement prices in 2007. New orders and the average new order sales price for the second quarter of 2007 decreased 15% and 11%, respectively, from the same period in 2006, as a result of the competitive sales environment within each of our markets in the North East segment, and as a result of an increase in the cancellation rate to 15% in the second quarter of 2007 from 11% in the second quarter of 2006. In addition, new orders were negatively impacted by a 27% reduction in the average number of active communities within the North East segment to 51 communities in the second quarter of 2007 from 70 communities in the same period in 2006.

Six Months Ended June 30, 2007 and 2006

     The North East segment had an approximate $23,000 decrease in segment profit in the six months ended June 30, 2007 compared to the same period in 2006. Revenues decreased 30% for the six months ended June 30, 2007 from the prior year period due to a 24% decrease in the number of units settled and an 8% decrease in the average settlement price. The decrease in the number of units settled is primarily attributable to a 31% lower beginning backlog period over period partially offset by a higher backlog turnover rate in 2007 as compared to 2006. Gross profit margins decreased to 15.3% in the first six months of 2007 from 20.3% in the same period 2006, primarily as a result of the increased pressure on selling prices, resulting in the 8% lower average settlement prices period over period. Backlog units and dollars were 17% and 27% lower, respectively, in the first six months of 2007 compared to the same period in 2006, due primarily to a 31% lower backlog unit balance entering 2007 compared to the same period in 2006.

Mid East

Three Months Ended June 30, 2007 and 2006

     The Mid East segment profit remained relatively flat in the three months ended June 30, 2007 compared to the same period in 2006. Revenues decreased 19% due to an 18% decrease in the number of units settled. The decrease in the settlements is primarily attributable to a 10% lower backlog unit balance entering the second quarter of 2007 compared to the same period in 2006, coupled with a lower backlog turnover rate in the current year quarter. Gross profit margins increased to 18.5% in the second quarter of 2007 from 17.1% in the same period of 2006 as a result of average settlement prices remaining consistent with 2006 levels and increased efforts to control operating costs, including personnel and material costs. New orders for the second quarter of 2007 decreased 15% from the same period in 2006 and the average price for new orders declined 9% quarter over quarter. The decrease in new orders was attributable to the challenging current market environment, as well as to an increase in the segment’s cancellation rate to 14% in the second quarter of 2007 from 10% in the second quarter of 2006. In response to the current market conditions, we have introduced smaller product offerings and product offerings with fewer available options at lower selling prices, contributing to the average new order sales price decline. We expect that selling prices and gross profit margins in the markets within this segment will be negatively impacted in future quarters by affordability issues and a tougher lending environment resulting from the sub-prime mortgage market deterioration.

Six Months Ended June 30, 2007 and 2006

     The Mid East segment had an approximate $6,000 increase in segment profit in the six months ended June 30, 2007 compared to the same period in 2006, despite a decrease of approximately 15% in revenues for the six months ended June 30, 2007 from the prior year period. The decrease in revenues is due primarily to a 14% decrease in the number of units settled in the first six months of 2007 as compared to the same period in 2006. The decrease in the number of units settled is primarily attributable to a 20% lower beginning backlog period over period. Gross profit margins increased to 19.0% in the first six months of 2007 from 16.9% in the same period in 2006 as a result of average settlement prices remaining consistent with 2006 levels and increased efforts to control operating costs, including personnel and material costs. Backlog units and dollars were 8% and 14% lower, respectively, than the 2006 period.

South East

Three Months Ended June 30, 2007 and 2006

     The South East segment has not been as severely impacted by the adverse economic conditions within the homebuilding industry as our other reporting segments, although the markets in this segment are showing similar signs of the overall slowdown being experienced in our other reporting segments. The South East segment had an approximate $2,000 increase in segment profit in the three months ended June 30, 2007 compared to the same period in 2006. Revenues increased 4% for the three months ended June 30, 2007 from the prior year quarter despite a 13% decrease in the number of units settled, as a result of a 20% increase in the average settlement price. The increase in the average settlement price is attributable to the average price of homes in backlog at the beginning of the second quarter of 2007 being 20% higher than at the same period in 2006. These higher backlog values resulted from the favorable market conditions experienced in the South East segment in prior quarters, allowing us to increase sales prices, as well as a general shift in sales within the Charlotte, N.C. sub-market to a larger, higher priced product. The decrease in units settled in the second quarter of 2007 is attributable to development delays in certain markets within the segment, slowing our access to developed lots. Gross profit margins increased to 23.3% in the second quarter of 2007 from 22.5% in the same period of 2006 due to the higher average settlement prices experienced in the current quarter. New orders during the second quarter of 2007 were 9% lower than the second quarter of 2006, however, the average new order price was 11% higher during the same respective periods. The decrease in new orders is primarily attributable to lower sales absorption on a flat average number of active communities quarter over quarter as a result of the development delays previously mentioned, slowing our ability to sell in certain communities, and due to the weakening market conditions. We expect market conditions to become more challenging in future quarters within the South East segment resulting in increased pricing pressures on new orders.

Six Months Ended June 30, 2007 and 2006

     The South East segment had an approximate $10,000 increase in segment profit in the six months ended June 30, 2007 compared to the same period in 2006. Revenues increased 13% for the six months ended June 30, 2007 from the prior year period due to a 19% increase in the average settlement price, offset partially by a 5% decrease in the number of units settled. As noted above in the discussion of the second quarter results, the increase in the average settlement price is attributable to the average price of homes in backlog at the beginning of 2007 being 20% higher than at the same period in 2006 due to favorable market conditions allowing us to increase selling prices in prior quarters and the aforementioned shift into more upscale communities. Gross profit margins increased to 23.6% in the first six months of 2007 from 22.2% in the same period of 2006 as a result of the increase in the average settlement prices in 2007 to date. Backlog dollars were 3% higher than the 2006 period due to a comparative higher average selling price of 15% during the period. The higher average selling prices were partially offset by a decrease of 11% in backlog units partially attributable to the a 4% lower backlog unit balance entering 2007 compared to the same period in 2006, coupled with a 10% decrease in new orders period over period. The decrease in new orders is primarily attributable to lower sales absorption on a flat average number of active communities quarter over quarter as a result of the development delays previously mentioned and due to the weakening market conditions within the segment.

Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations

     In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead, consolidation adjustments, stock option compensation expenses, and external corporate interest. NVR’s overhead functions, such as accounting, treasury, human resources, land acquisition, etc., are centrally performed and the costs are not allocated to the Company’s operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to the Company’s operating segments. Likewise, stock option compensation expenses are not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on the Company’s outstanding Senior Notes and working capital line borrowings, and are not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Homebuilding Consolidated Gross Profit:
Homebuilding Mid Atlantic		$	179,537			$	337,906			$	341,570			$	593,129
Homebuilding North East			16,794				36,806				31,047				59,517
Homebuilding Mid East			41,571				47,506				72,172				75,124
Homebuilding South East			39,100				36,481				73,223				61,031
Consolidation adjustments and other			(41,799	)			(40,085	)			(61,109	)			(47,484	)
Segment gross profit		$	235,203			$	418,614			$	456,903			$	741,317

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Homebuilding Consolidated Profit Before Tax:
Homebuilding Mid Atlantic		$	115,291			$	259,977			$	218,660			$	447,484
Homebuilding North East			4,583				21,613				8,008				31,390
Homebuilding Mid East			21,862				23,240				35,874				30,096
Homebuilding South East			25,437				23,910				48,164				38,344
Segment profit before tax			167,173				328,740				310,706				547,314
Reconciling items:
Contract land deposit impairments			(39,115	)			(22,357	)			(47,605	)			(29,237	)
Stock option expense			(13,301	)			(12,732	)			(26,739	)			(25,431	)
Corporate capital allocation (1)			38,766				48,643				74,229				90,230
Unallocated corporate overhead (2)			(20,288	)			(26,978	)			(46,271	)			(61,461	)
Consolidation adjustments and other (3)			5,850				(13,486	)			5,837				(8,722	)
Corporate interest expense (4)			(3,127	)			(6,238	)			(6,262	)			(11,555	)
Reconciling items sub-total			(31,215	)			(33,148	)			(46,811	)			(46,176	)
Homebuilding consolidated profit before taxes		$	135,958			$	295,592			$	263,895			$	501,138

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Homebuilding Mid Atlantic		$	26,457			$	34,672			$	51,502			$	64,793
Homebuilding North East			4,064				5,069				7,603				9,319
Homebuilding Mid East			4,683				5,706				8,510				10,381
Homebuilding South East			3,562				3,196				6,614				5,737
Total		$	38,766			$	48,643			$	74,229			$	90,230

Mortgage Banking Segment

Three and Six Months Ended June 30, 2007 and 2006

     We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses exclusively on serving the homebuilding segment’s customer base.

		Three Months Ended June 30,								Six Months Ended June 30,
		2007				2006				2007				2006
Loan closing volume:
Total principal		$	849,430			$	1,123,461			$	1,564,469			$	1,860,243
Percent sub-prime			6	%			5	%			7	%			6	%
Loan volume mix:
Adjustable rate mortgages			21	%			39	%			24	%			38	%
Fixed-rate mortgages			79	%			61	%			76	%			62	%
Operating profit:
Segment profit		$	12,604			$	18,350			$	23,584			$	31,692
Stock option expense			(885	)			(864	)			(1,770	)			(1,725	)
Mortgage banking income before tax		$	11,719			$	17,486			$	21,814			$	29,967
Mortgage banking fees:
Net gain on sale of loans		$	14,042			$	19,009			$	27,402			$	34,802
Title services			5,368				6,830				9,913				11,711
Servicing			118				292				292				531
		$	19,528			$	26,131			$	37,607			$	47,044