Reef Report

Headline Inflation

Core Inflation

The energy shock that began as a headline-only story is now spreading. April CPI rose 0.6% on the month and 3.8% year-over-year, per BLS, the highest annual reading since May 2023 and a half-point jump from March. Energy did most of the work again: the energy index climbed 3.8% on the month and 17.9% over the year, accounting for more than 40% of the all-items gain, with gasoline up 5.4% in April alone and 28.4% over twelve months. The national pump price reached roughly $4.50 a gallon. What changed this month is the core. Core CPI rose 0.4%, its firmest monthly print of the year, lifting the annual rate to 2.8% from 2.6%. Airfares, delivery costs, and other transport-sensitive services are now carrying the fuel pass-through into categories the Federal Reserve cannot dismiss as transitory. The argument that this was a contained commodity spike has weakened with the data.

Unemployment Rate

Nonfarm Payrolls

Consumer Sentiment

The labor market is bending without breaking. Nonfarm payrolls rose 115,000 in April, beating a soft 65,000 consensus, and the unemployment rate held at 4.3%. After February’s contraction and March’s strike-distorted rebound, April reads as the underlying trend reasserting itself: positive, but modest, and well below the pace that absorbs new entrants. The sharper signal came from the household survey. The University of Michigan consumer sentiment index fell to 44.8 in May, a record low and its third consecutive monthly decline, with year-ahead inflation expectations elevated as pump prices climbed. The Conference Board’s measure sits at 93.1, with 57% of respondents citing high prices as the chief drag on their finances. The first estimate of Q1 GDP came in at 2.0%; the second estimate, released this week, was revised down to 1.6% on softer investment and consumer spending. Growth remains positive while sentiment collapses, and the gap between the two is where the next quarter will be decided.

Mortgage rates climbed every week of May. The 30-year fixed moved from 6.36% in mid-May to 6.51% on the 21st and 6.53% by the 28th, per Freddie Mac, a 30 basis-point round trip back toward the cycle highs after April’s brief relief. Spot oil fell sharply over the month; the move in rates came from the inflation print and the repricing of the Federal Reserve. The 10-year Treasury yield sits at 4.30%, little changed from April on net, but it masked sharp intramonth swings: the 30-year Treasury yield topped 5.1% in mid-May after the Xi-Trump summit failed to produce an Iran breakthrough, before retracing as oil rolled over. The year-over-year comparison still flatters, with rates at 6.89% a year ago, but the trajectory is unambiguous. Rates are rising into a market that needs them to fall, and the reason they are rising is an inflation problem that monetary policy did not create and cannot quickly fix.

Mortgage Payments to Household Income Ratio

Nominal Monthly Mortgage Payment

Our affordability series runs through March, and it still shows the year-over-year improvement that defined the winter: the payment-to-income ratio at 27.8% and the median monthly payment at $1,940, both down 11.7% from a year ago. That improvement is now a rear-view-mirror number. The March reading was struck when the 30-year sat near 6.2%; the May reading, when it arrives, will absorb three weeks of rates above 6.50% against a median existing price that pushed to a fresh record. The favorable annual comparison is also fading on its own, because a year ago rates averaged 6.89%. Measured against the pre-2022 baseline, the structural gap remains punishing: payments are still up 62.6% over five years and the income ratio up 37.5%. The window for further affordability gains, which we have flagged as narrowing for two months, has effectively closed.

Existing Home Sales

Median Existing Home Price

Case-Shiller National Index

Existing home sales rose 0.2% in April to a 4.02 million annual rate, per NAR, leaving volume flat against a year ago and stuck near the bottom of its multi-year range. Prices are where the change is showing. The median existing price rose 0.9% to a record $417,700, the 34th straight month of annual gains, but the rate of appreciation continues to decelerate. The cleaner read comes from Case-Shiller: national home prices rose just 0.7% year-over-year in March, down from 0.8%, and for the first time in this cycle more than half of the major metropolitan markets posted outright annual price declines. Seattle led the downside at -2.5%; Chicago remained the strongest at +6.1%. The national index is positive only because a handful of supply-constrained markets are still rising. Beneath the headline, the broad middle of the country has stopped appreciating. Flat sales, decelerating prices, and building inventory are the three ingredients of a turn, and all three are now present.

Active listings climbed back above one million in April, reaching 1,002,935, per Realtor.com, recovering the ground lost since the January trough of 912,696. The recovery is the headline; the deceleration beneath it is the more important detail. Year-over-year inventory growth has slowed to 4.6% from the 8.1% pace of March and the 15-to-20% increases that characterized mid-2025. New listings rose just 1.1%, a sign that sellers, watching rates climb back through 6.50%, are growing more reluctant to test the market. Median days on market lengthened to 52, two days slower than a year ago and the 25th consecutive month of year-over-year deceleration in sales pace. The seller-stress signal has eased from last quarter: 327,402 listings carried a price reduction, fewer than the 335,962 of a year ago even as total inventory grew, while the median list price fell 1.4% over twelve months in its sixth straight month of annual declines. Inventory is normalizing at a measured pace. The question for summer is whether the supply that has accumulated meets demand that the rate move is actively suppressing.

Housing Starts

Building Permits

April reversed the starts-permits divergence we flagged last month. Housing starts eased 2.8% to 1,465,000, giving back part of March’s outsized 12% jump as the projects greenlit in the winter rate dip worked through. Permits, the leading indicator that collapsed 11% in March, rebounded 5.8% to 1,442,000. That bounce is worth watching but not over-reading. Permits remain down 0.2% year-over-year and below the run-rate of early 2025, and the rebound likely reflects builders pulling forward filings during the brief early-May lull in oil rather than a durable improvement in conditions. The signal that matters is that starts and permits have converged near 1.45 million, a level that is neither expansionary nor collapsing. The pipeline is being held flat rather than expanded. With mortgage rates back above 6.50% and the May permit window closing into a fresh inflation scare, the more probable path is renewed softening in the filings data over the summer.

New Home Sales

New Housing Supply

Median New Home Price

New home sales fell 6.2% in April to a 622,000 annual rate, down 11.3% from a year ago, with Census attributing the weakness to inflation, rates, and Iran-related uncertainty. The inventory math turned sharply. Months’ supply of new homes jumped to 9.4 from 8.7, back into the territory that historically precedes builder retrenchment; outside of 2007-2010 and the 2022 air pocket, the post-1980 record rarely holds above 9 months. The median new home price rose to $422,500, an 8.0% monthly jump that reflects mix more than pricing power, and it pushed the new home median back above the existing median of $417,700, reversing the convergence that defined the winter. The reversal reflects mix, not pricing power: the sales that cleared in April skewed toward higher-priced product while entry-level demand, the segment most exposed to the rate move, evaporated. Builders are selling fewer homes at a higher average price to a thinner pool of buyers.

NAHB Housing Market Index

Construction Activity

The NAHB Housing Market Index rose three points to 37 in May, a hair above the consensus 35 and a rebound from April’s seven-month low. The improvement is genuine but modest. May marked the 25th consecutive month below the 50 break-even line, the level above which more builders view conditions as good than poor. The components moved together: current sales up to 40, future sales up to 45, and buyer traffic up to 25, which remains deeply depressed. The pricing data carries the more durable signal. The share of builders cutting prices fell to 32% from 36%, but the average reduction widened to 6% from 5%, and incentive use ticked up to 61%, the 14th straight month at or above 60%. Builders are cutting fewer list prices while discounting harder on the homes they do move. Residential construction employment slipped to 926,500, down 0.2% on the month and 0.8% on the year, the quiet erosion that accompanies a sector that has stopped adding capacity. The early-May dip in oil gave sentiment a small lift; the late-May move in rates will test how long it holds.

The Iran war reached its 90th day this week, and the oil market has stopped pricing peace. Brent crude, which spiked back toward $119 around the April FOMC and again in mid-May when the Xi-Trump summit failed to produce a breakthrough, has settled near $94, with WTI close to $90. The catalyst was Project Freedom, the US-led effort to guide commercial convoys through the Strait of Hormuz that Iran declared closed on March 4. The conditional April 17 reopening we flagged last month never held, and convoys would not move without escorts; Project Freedom is the first mechanism to actually move tankers. The first South Korean and Chinese supertankers cleared the strait on May 20, and the war premium began to compress almost immediately. The recovery is conditional and reversible. The convoys move without committed military escorts, sanctioned Iranian crude remains blocked, and as of this week President Trump says he is “not satisfied” with the talks while the White House denies any draft agreement. A $94 Brent floor is now the market’s base case, but it sits on top of an active conflict that has already re-priced twice.

The relief is real where it has arrived and absent where it matters most. Lower spot oil should, with a lag, ease the next CPI prints and pull mortgage rates back from their late-May highs. But the easing has not yet reached the data. April CPI at 3.8% captured the peak of the pass-through, gasoline is still near $4.50 a gallon, up more than a dollar since the war began, and the structural damage to the Gulf supply chain persists: OPEC production remains sharply reduced, the UAE formally exited the cartel on May 1, and the IEA-coordinated emergency reserve release is an exchange that must eventually be repaid into the market. Iraq is heading into summer blackouts as Iranian gas exports collapse. For housing, the transmission chain is unchanged from last month. The path of oil sets the path of rates, which sets the path of demand. If Brent holds in the $90s, mortgage rates can drift back toward the low 6s by late summer and the market resumes its grind. If a single Hormuz incident reopens the war premium, $130 Brent and 6.75% mortgages return, and the spring selling season stalls before it can develop.

The Federal Reserve changed hands this month, and the market’s read of what that means inverted within hours. Jerome Powell’s term as chair ended May 15. Kevin Warsh, confirmed by the Senate on May 13, was sworn in as the 17th chair on May 22, with President Trump telling him publicly to “do your own thing.” Powell will remain on the Board of Governors, the first former chair to do so in 75 years, a decision he tied to the Justice Department probe opened in January into the central bank’s headquarters renovation. Markets had spent months assuming the handoff to Warsh implied a dovish pivot. By the afternoon of his swearing-in, the consensus had flipped: Wall Street is now actively pricing a rate increase by year-end 2026. Governor Christopher Waller, speaking in Germany, said he “can’t rule out” voting to raise rates and that “inflation is not headed in the right direction.”

This is the trap we have described for three months, now wearing a new face. April’s 8-to-4 FOMC split, the most dissents since 1992, was a committee that could not agree on whether to look through a supply shock. A 3.8% headline print and a firming core have since pushed the debate from “when do we cut” to “do we have to hike.” The Fed has not cut all year; the effective funds rate sits at 3.64%, and the dot plot’s lone projected cut now looks stale. There is no meeting in May. The next decision comes June 17, and it arrives into a genuinely conflicting dataset: inflation accelerating, growth revised down to 1.6%, sentiment at a record low, and a labor market that is softening rather than cracking.

The starkest feature of the setup is the divergence between markets. Equities are at all-time highs, carried by an AI capital-expenditure cycle that has absorbed ninety days of war headlines without flinching. Housing is frozen at the cycle’s most expensive financing in a generation. The same narrow pillars we have described since February, wealthy-consumer spending and AI capex, are doing all the work, while the broad middle of the economy contends with $4.50 gasoline and 6.53% mortgages. A new chair inherits an institution that cannot cut into a 3.8% print and cannot hike into a weakening labor market without inviting the recession it is trying to avoid. For housing, the implication is the one we have carried all spring: relief now depends less on the Fed than on the Strait of Hormuz, and that is not a comfortable place for a $50 trillion asset class to sit.