Reef Report

Headline Inflation

Core Inflation

The energy pass-through we flagged last month arrived faster and harder than consensus expected. March headline CPI rose 0.9% on the month, per BLS, the largest single-month increase in nearly half a century, and 3.3% year-over-year, up from 2.4% in February. Energy rose 10.9% in March alone, with gasoline up 21.2%, the largest monthly gasoline print since the series began in 1967. Energy accounted for nearly three-quarters of the headline move. Core inflation, which strips out food and energy, rose just 0.2% on the month and 2.6% year-over-year, suggesting the shock is still concentrated rather than broad-based. Shelter inflation continues to decelerate at 3.0% year-over-year, the slowest since early 2022. The Fed’s preferred narrative, that disinflation in services would offset commodity volatility, is being tested in real time.

Unemployment Rate

Nonfarm Payrolls

The March payrolls report broke the negative streak. Nonfarm employment rose 178,000, beating consensus of 130,000, and the unemployment rate ticked back down to 4.3%. February was revised lower to a 133,000-job loss from the initial -92,000 print, deepening that miss. The bounce was concentrated: healthcare added 76,000 jobs, with roughly 35,000 reflecting Kaiser Permanente strike workers returning to payrolls. Construction added 26,000, an unexpected positive given builder sentiment. Federal government employment continued to decline. Average hourly earnings rose 3.5% year-over-year, the slowest pace since 2021, narrowing the gap with inflation that just re-accelerated. Job openings fell to 6.88 million in February, down 5.0% year-over-year. The labor market is not collapsing, but the composition matters: most of the March gain was either strike reversal or a single sector. Strip those out and the underlying pace looks closer to the soft trend of late 2025.

Mortgage rates traced the full arc of the oil shock in three weeks. After climbing from a February low of 5.98% to 6.46% on April 2nd, the 30-year fixed has retraced 23 basis points to 6.23% by the latest weekly print. The path tracked Brent crude almost exactly: rates peaked the same week Brent topped $138 a barrel, and both began retracing on the April 17th announcement that the Strait of Hormuz had reopened to commercial shipping. The 10-year Treasury yield sits at 4.35%, with the 2-year at 3.84%, leaving the curve positively sloped at +52 basis points. Markets are not pricing in Fed cuts; they are pricing in a longer plateau at current rates, with the right tail of inflation outcomes much wider than it was in February.

Mortgage Payments to Household Income Ratio

Nominal Monthly Mortgage Payment

The most recent affordability reading reflects March conditions, before the late-month rate spike worked through. Year-over-year, the payment-to-income ratio is down 11.7% and the median monthly payment is $258 cheaper than a year ago. That is real improvement. But the year-over-year benchmark is the cycle peak: a year ago the 30-year averaged 6.65%. Measured against pre-2022 conditions, before the rate shock, affordability still sits 37.5% worse on the income ratio and 62.6% worse on the nominal payment. The April number, when it arrives, will absorb three weeks of rates above 6.30%. Expect those gains to give back. The window for further improvement that opened in February is now narrower than it looked thirty days ago.

Existing Home Sales

Median Existing Home Price

Months’ Supply

Existing home sales fell 3.6% in March to a 3.98 million annual rate, the slowest pace for any March on record outside of 2024 and the early-pandemic period. Sales declined in all four regions month-over-month, and were lower year-over-year in the Northeast and Midwest. Median prices held up better: NAR’s headline figure rose 1.4% to $408,800, the 33rd consecutive month of year-over-year increases, and a fresh record for the month of March. Inventory tells the more important story. Total existing inventory climbed to 1.36 million units, up 3.0% from February and 2.3% from a year ago. Months’ supply rose to 4.1 from 3.8. Buyers are pulling back as sellers continue to list. That imbalance, sustained over enough months, is what produces price declines. The data has not turned yet, but the conditions are aligning.

Active listings rose 5.4% in March to 964,477, per Realtor.com, with new listings surging 21.2% as sellers responded to the spring buying season and the early-March drop in rates. The year-over-year pace has slowed to 8.1%, decelerating meaningfully from the 15-20% increases that defined mid-2025. Median days on market fell to 57, down from 70 in February but still well above the 53-day pace of March 2025. The composition is mixed: more homes are coming to market and clearing slightly faster than at the winter trough, but 293,594 active listings have had at least one price reduction. That is the highest March count in our records, and the most direct seller signal we track. Inventory growth is no longer the unambiguous bearish signal it was six months ago. What matters now is whether the share with price cuts keeps climbing into summer.

Housing Starts

Building Permits

March produced one of the widest starts-permits divergences on record. Housing starts jumped 10.8% to 1,502,000 units, per Census, with single-family starts hitting a 13-month high of 1,032,000. In the same release, permits fell 10.8% to 1,372,000, the largest monthly permit decline in over two years. Multifamily permits collapsed 21.5%. The mismatch is mechanical: starts reflect projects greenlit weeks or months ago, when rates were dipping into the high fives and demand looked like it might thaw. Permits are forward-looking and capture builder decisions made in March itself, against a backdrop of $138 oil, climbing rates, and material cost uncertainty. The takeaway is straightforward. The pipeline that landed in March was set up in January and February. The pipeline being set up now is shrinking. Expect starts to follow permits lower over the next two to three months.

New Housing Supply

Existing Home Inventory

Construction Employment

New home months’ supply jumped to 9.7 in January, up from 8.0 in December and 9.0 a year ago. That is recession-territory inventory: the only periods in the post-1980 record above 9.5 months are 2007 to 2010 and the worst of 2022. Existing inventory climbed to 1.36 million units in March, per NAR, with months’ supply at 4.1. Residential construction employment held at 931,600, up modestly month-over-month but still down 0.4% year-over-year. The picture is one of supply that is growing on both sides of the market: builders sitting on completed and unsold inventory, sellers continuing to list, buyers hesitating. With the median new home price at $400,500, essentially equal to the median existing home, builders have run out of pricing room. That is why incentive activity has stayed elevated even as headline price cuts have eased slightly.

NAHB Housing Market Index

Cost Pressure

The April NAHB Housing Market Index fell four points to 34, per NAHB, the lowest reading since September 2025 and the 25th consecutive month below the 50 break-even level. The internal components were uniformly weaker: current sales conditions fell to 37, future sales expectations dropped seven points to 42, and buyer traffic fell to 22. Regionally, only the South held flat; the West fell to 29 on the three-month moving average. Cost pressure has shifted from labor and materials to fuel: 62% of builders reported suppliers raising prices on fuel-related inputs, and 70% said material cost uncertainty was making it difficult to price homes. Energy is roughly 4% of construction inputs by value, so the direct impact is modest, but the indirect impact through transportation, asphalt, and resin-based products is meaningful. The share of builders cutting prices fell slightly to 36% from 37%, with average reductions narrowing from 6% to 5%, while incentive use stayed elevated at 60%. Builders are not easing pressure on margins; they are shifting it from price cuts onto promotions.

On April 17th, Iran’s foreign minister announced that the Strait of Hormuz was open to commercial shipping for the duration of the Lebanon ceasefire. Brent crude fell from $116.63 the prior session to $98.63 at settlement, a 15.4% drop. Within forty-eight hours it was back above $100, and as of April 27th it sits at $113.89, roughly 47% above where it was on March 2nd, before the Strait closed. WTI follows the same pattern. The market has chosen to interpret the reopening as conditional rather than permanent. The U.S. blockade remains in place, Iran has signaled it will reimpose restrictions if pressed, and global shipping insurers have not yet returned premiums to pre-conflict levels.

The macro consequences arrived faster than the geopolitics resolved. The March CPI print captured the first wave of the energy pass-through with a 21.2% monthly jump in gasoline. April will capture more, and the timing of Strait reopening means the gas price spike will only partially unwind in the May data. The Michigan consumer sentiment index fell to 53.3 in March, its lowest reading since late 2025, with year-ahead inflation expectations elevated. Markets are now debating whether headline inflation rolls over by Q3 as base effects fade, or whether enough of the energy shock has migrated into core categories to keep CPI in the 3.0-3.5% range through year end.

For housing, the path of oil determines the path of rates determines the path of demand. If Brent stabilizes in the $95-110 range, mortgage rates plausibly hold near 6.25% and the market continues its current grind. If oil pushes back toward $130, rates revisit 6.50% and the housing thaw that began in February is over for the year. The most useful framework right now is conditional: the housing market is no longer a function of housing fundamentals, it is a function of energy prices.

The April 29th FOMC meeting produced the most divided vote since October 1992. The Committee held the funds rate at 3.50 to 3.75%, but four members dissented. Stephen Miran called for a quarter-point cut; three others objected to the forward guidance language. The 8-to-4 split is unusual on its own. Combined with what is widely expected to be Chair Powell’s last meeting before a leadership transition, it signals an institution that is genuinely uncertain about its next move and not papering over the disagreement.

The Committee’s statement language shifted: “Inflation is elevated, in part reflecting the recent increase in global energy prices.” That added clause is the policy response itself. The Fed is signaling that it views the inflation acceleration as supply-driven rather than demand-driven, which would normally argue for looking through it. But with three FOMC members now expecting no cuts at all in 2026 and the dot plot still showing a single cut as the median, the median is doing a lot of work. The Atlanta Fed’s GDPNow model was tracking Q1 growth at 1.2% annualized into the advance estimate release, with private forecasts clustered between 1.5% and 2.5%. That follows a Q4 2025 print revised down to 0.5% annualized in the third estimate. Beneath the headline, consumer spending is weakening at the lower end while AI capex continues to drive growth. The same narrow pillars we have been describing for two months.

The labor market March bounce gives the Fed cover to stay on hold for now. The Iran shock gives it cover to wait through summer. The political pressure to cut is real and growing, but the institutional cost of cutting into a 3.3% inflation print is also real. Our base case is that the Fed holds through the June meeting, watches whether the energy pass-through has worked through the data, and reassesses in September. The risk to that path is asymmetric. A material softening in payrolls between now and August could force a cut even as inflation runs hot, which would be a deeply uncomfortable outcome for an institution whose credibility is already strained. For housing, the implication is that the next two quarters will be defined by rates that are too high for the market to function and a Fed that cannot lower them without compounding an inflation problem that is not its making.