Everyday Economics: The macro backdrop is more difficult, and that matters for housing

(The Center Square) — Last week's inflation report showed the first clear signs that the conflict with Iran is feeding into the U.S. economy through energy prices. Consumer prices rose 3.3% in March from a year earlier, up from 2.4% in February. Core inflation was firmer too, rising 2.6% over the year. The big story, though, was energy. The gasoline index surged 21.2% in March alone and accounted for nearly three-quarters of the monthly increase in headline CPI. That is not the kind of inflation shock the Federal Reserve can easily fix. Higher interest rates do not produce more oil. But they can weaken demand further, and that is a problem when the labor market is already losing momentum.

That is why the inflation shock matters even if it eventually proves temporary. A one-time jump in the price level still erodes purchasing power. Households pay more at the pump, shipping costs rise, firms face margin pressure, and some of those costs begin to show up outside the energy sector. The result is a Fed that is likely to stay cautious for longer. Officials cannot confidently cut rates into an inflation rebound, but tightening policy in response to an oil shock could make a weak economy weaker. That leaves monetary policy stuck in a holding pattern just as households and businesses absorb another hit.

This week's economic data reports will be mostly about housing. The macro headlines are already affecting housing-market activity.

March existing-home sales are due along with the April NAHB/Wells Fargo builder confidence Index. Existing-home sales should show a small improvement because they reflect homes that went under contract in February, before the latest oil shock fully hit inflation, confidence and rates. In other words, this week's sales report will still capture a market that had not yet absorbed the full force of the new macro shock.

March gave us an early look at the housing market during the first month of the conflict, and the message was more resilient than many would have expected. Despite higher inflation, slower hiring, and softer nominal wage growth, housing activity did not roll over. Zillow's March market report showed 281,546 newly pending listings, the second-highest monthly total since August 2022. Newly pending sales were up 4.6% from a year earlier. Seasonal activity improved in March despite major headwinds. Household budgets may be running on fumes, but demand has not yet fallen below year-ago levels.

Part of that resilience reflects the fact that mortgage rates, while still high, remain below where they were a year ago. That has offered some support to buyers even as affordability remains strained. Demand also appears to be holding up better than the macro backdrop would suggest, a sign that many households were still willing to move forward even as energy prices rose and uncertainty increased.

The question now is what happens next. At the start of the conflict, many expected the shock to be short-lived. The fragility of the two-week ceasefire — and the collapse of peace talks in Islamabad this weekend — makes that assumption harder to maintain. If energy prices stay elevated for longer, the drag on housing could become more visible in the months ahead. Higher inflation would continue to squeeze real incomes, slower hiring would make households more cautious, and softer real wages would limit how far buyers can stretch. If inflation also keeps Treasury yields elevated, mortgage rates may not provide much additional relief.

That is the risk for the rest of 2026. Housing has held up better than expected so far, but it has done so in an economy where the consumer is already under pressure and where the Federal Reserve has little room to offer support. The market has been resilient. The real question is whether it can stay resilient if the energy shock lasts longer than expected.

The new-home side of the market looks even more exposed. Builder confidence remains weak. With more homes still in the construction pipeline and resale inventory continuing to rise, builder sentiment and housing starts are likely to remain soft through 2026. This is not a housing boom. It is a market that has managed to keep moving in the face of serious headwinds. But if the conflict drags on and energy prices remain high, that resilience will be tested.

Orphe Divounguy is an economist with Zillow and the co-host of The Center Square's Everyday Economics podcast.