Ken Kahan makes a living building homes.

A specialty? Luxury apartment complexes in Los Angeles neighborhoods such as Palms and Silver Lake filled with mostly market rate units, but with a handful of income-restricted affordable ones as well.

It can be a good business, but lately less so.

"We have pulled back," said Kahan, the president of California Landmark Group. "The metrics don't work."

Across California and the nation, developers moved to start fewer homes in 2023, a decline some experts say could eventually send home prices and rents even higher as supply shortages worsen.

Developers cite several reasons for delaying new projects. There's high labor and material costs, as well as new local regulations that together make it harder to turn a profit.

Perhaps the biggest factor — and one hitting across the country — is the high cost of borrowing. Rising interest rates not only make it more expensive for Americans to buy a home, but they add additional costs for developers who must shell out more money to build and manage their projects.

As a result, fewer projects make financial sense to build and fewer homes are built.

"More than anything it is debt costs," said Ryan Patap, an analyst for real estate research firm CoStar.

In all, preliminary data from the US. Census Bureau show building permits for new homes nationwide fell 12% in 2023 from the prior year and 7% in California. Drops were recorded in both single-family homes — most of which tend to be for sale — as well as multifamily homes — which are chiefly rentals.

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