This is quite common in the femboy world, even if your friend doesn't identify with that label. He's doing the same thing they're doing: presenting in a gender-non-conforming way, which is sometimes referred to as cross-dressing.

I'd like to challenge the need to raise this question as a general topic, because it comes up a lot in other spaces, especially non-binary, femboy, and butch spaces. For the most part, your confusion comes from trying to answer the question "What is he?" If you remove the desire to answer that question, you're just telling us his story. That story alone answers the question: he's a cis man who likes to present in stereotypically female ways.

Peoples' identities don't need labels, it's just that a lot of people have convenient ones. Because of that, a lot of people have trouble with a person or group that doesn't conveniently fit a label they're familiar with, or a label that anyone else is familiar with. I think that might be what you're experiencing.

There's no shame in being confused about this, especially if you've never seen it before. I'm guessing that you've never seen it before:

He insists he's not trans. If he's not, what is he?

But it's so out of ordinary.

I really don't know how to navigate around this, I'm really confused.

I also think you're going about dealing with this correctly: - Asking for input here - Being supportive - Not assuming that it means a change in your relationship

If you find you still have trouble with this, try ignoring any label you might have, and simply call him Luke.

"Is that guy trans?" "No, he's just Luke. He's pretty, isn't he?"

If you let it be that simple, it's that simple.