Using Historical Data to Predict Demand in The HVAC Industry

Introduction

This article is a deviation from the normal data that we present from our tracking platform happening in real-time.

We are going to use 3rd party data sources like new home construction, housing prices, install data and others to take a look back at what happened to demand during the Great Recession.

It’s not fun to talk about a recession, but I think it’s useful to look at what happened to demand from 2007-2011 to prepare ourselves for any downturn and predict how much of a downturn that might be.

Before we get into the data, let’s note a few things to make sense of the callouts I make below:

On December 1st 2008, the National Bureau of Economic Research stated that the US entered a recession in December 2007.

US housing prices peaked in Q1 of 2007 with an average price of $322,100 and bottomed in Q1 2009 at $257,000, a decrease of 20.2%.

New home construction dropped 25.49% from 2007 to 2008 and 61% through to the bottom in 2011.

Home prices have since risen 57.65% to an average price of $507,800 in Q1 2022, 35.59% of that increased occurred since Q2 2020.

Let’s Start With Historical Installation Data

A very simplified rule of thumb to predict HVAC demand is to look at the number of HVAC units installed 15 years ago, as that’s how long these units *typically* last. It’s not perfect - some units may last 8 years, others 25 years, but keeping it to 15 is simpler to help project demand.

I got year-by-year installation data from ACHRI and going forward in the article, will treat installations as customer demand.

We’ll start off with central air conditioner data:

The rule of thumb suggests, for example, that 2005 demand would correlate to 2020 demand.

2020 demand was up, but increased even more in 2021 likely due to COVID and installations being pushed into the new year.

If we follow the chart, we would expect demand to slow. E.g. 2006 correlates with 2021/2, 2007 correlates with 2022/3, 2008 correlates with 2023/4 and so on.

We now know that the Great Recession had already started in 2007 and demand for central air conditioners dropped 12% from ‘07 through ‘08 and dropped 17% from 2007 to 2010 (which was the bottom of demand).

Now let’s look at air source heat pumps:

Heat pumps dropped just 1.7% from 2007 to 2008 but demand decreased 13.5% from 2007 through to 2009 (the bottom).

Heat pumps are expected to rise in demand through 2030. The pattern is different, as its value is still being discovered by your customers as an energy efficient, electric alternative, so it’s possible that the demand curve doesn’t follow the 15-year rule of thumb as customers may opt for more energy efficient units before its time to replace their current units.

Finally, let’s look at furnace demand:

You can see that demand in 2004 is nearly identical to the demand in 2019, 15 years apart.

Oddly enough, furnaces saw the biggest initial drop in demand. 18% from 2007 to 2008, and 21.8% from 2007 to 2009.

Weather doesn’t seem to be the culprit because the winter of 2007-2008 was the coldest since 2001.

Recapping the Demand Drop for Central AC, Heat Pump and Furnaces in Year 1 of the Great Recession

Central AC demand dropped 12% from 2007 to 2008 and demand hit its lowest point in 2010.

Heat pump demand dropped 1.7% from 2007 to 2008 and demand hit its lowest point in 2009.

Furnace demand dropped 18% from 2007 to 2008 and demand hit its lowest point in 2009.

Housing prices also bottomed in 2009, but new home construction didn’t bottom out until 2011.

No one can predict the future, but based on the data from the Great Recession, it took between 2-3 years for AC, Heat Pump and Furnace installations to hit a low before rebounding.

Demand across all three HVAC units dropped by 10.5% in year 1.

New home construction dropped 25.49% in year 1.

Recapping the Demand Drop Until Bottom During the Great Recession

Central AC demand dropped 17% until it hit bottom in 2010.

Heat Pump demand dropped 13.5% until it hit bottom in 2009.

Furnace demand dropped 21.8% until it hit bottom in 2009.

The average demand across the three categories dropped 17.4% and each took 4 years from the bottom to recover back to 2007 demand levels.

New home construction didn’t bottom until 2011, dropping 61% but HVAC demand didn’t drop nearly as much.

Based on new home construction, you could project that in 2026 demand would slow based on the 15-year projection.

HVAC Contractor Business Growth

According to Ibisworld.com, there are 118,012 HVAC contractor businesses in the United States, which increased 2.1% from 2021.

There was a slight decline in the number of HVAC businesses from 2012 until 2017 and then growth expanded at a rate of 2.1% year on average over the last 5 years.

The point of adding this stat in here is that the number of HVAC businesses has not grown in proportion to the increased demand (21% increase in central AC from 2017 to 2021, for example).

Other Factors to Consider + Tying It All Together

This time around, we are dealing with inflation. While I wasn’t able to find good historical data for the average price of HVAC systems year-by-year, most manufacturers are increasing pricing by 18% or more.

Home prices are up significantly, and demand is only now just starting to trail off with rising interest rates.

We’re also dealing with a labor shortage, as I know many of you are well aware of.

ACHR news published data in March of 2022 that estimated 110,000 unfilled HVAC tech jobs.

To tie it all together - we could be in for a reduction of demand given the correlated reduction of new home construction 15 years ago, but the rate of growth for HVAC businesses in the US was much slower than consumer demand for the past 5 years.

When factoring in labor shortages, my guess is that we will continue to see more industry consolidation that will be less impacted by a reduction of demand, if that happens.

The US HVAC systems market is expected to grow 5.6% from 2022 to 2030, some of that cited by the US government promoting lower power consumption and use of renewable energy sources in the form of tax credits.

Using our 15-year rule of thumb demand prediction, we may not see that slump, but only time will tell.

The key for anyone reading this is that every detail counts and the historical data would suggest to prepare for a reduction in demand.

I know that’s said many times, and we’re all experiencing high demand with the warmer weather, but the best time to fix a leaky roof is when the sun is shining.

More to come on this subject, but don’t take lead volume and high demand for granted :)