U.S. consumer spending has been slowed down due to economic factors such as oil prices. The housing market has also hit a slump, even to the point of home values falling, according to Rick Wolff, a professor of economics at the University of Massachusetts-Amherst.
"People borrowed to buy or expand a home," Wolff explained. "The boom in building and improving homes generated a huge portion of the rising consumer spending that kept the U.S. economy afloat. This cycle of borrowing-building, and borrowing and building more, produced a historic run-up in home prices alongside a historic rise in consumer debt.
"But the building has now stopped growing and started tanking," he said. "Falling new home sales will force down new home prices. Sellers of older homes will face competition from falling new home prices, so they, too, will lower their prices to find buyers." Foreclosures are rising across the nation.
"Under these conditions, the rising tide of purchases of goods and services made possible by the cycle of home building and mortgage borrowing is not only ending, it is reversing at a fast clip."
But does this apply to appliances, such as heating and cooling systems? Are these an investment that raises the home's value, or part of the goods and services that have already taken a heavy hit? HVAC products and services may not officially fall under that category, but really, it depends on how they are perceived by the consumer.
WEATHER EYE
As usual, the weather can play a key role in this winter's heating season forecast. If it's cold and consumers are still hurting from last year's high heating fuel costs, a new heating system could easily be perceived as a worthwhile investment to keep costs down and increase the home's value."Weather always matters," said Karen Meyers, manager of marketing services and government relations, Rheem Air Conditioning. "Sustained cold spells will generate more furnace sales just like sustained warmer periods generate more condenser sales."
According to Meyers, "The National Oceanic and Atmospheric Administration (NOAA) put out an advisory in early August that there was a 50 percent chance that an El Niño could return this winter and cause seasonally warm temperatures throughout the Northeast, Northwest, Great Plains, and Midwest during January through March 2007. They recently revised their forecast, stating that the El Niño had returned and will cause these seasonally warm temperatures. This pattern could develop as early as fourth quarter 2006.
"Any seasonal warming trends in these regions could impact the industry's heating product sales," she pointed out.
"Although this could affect both parts and equipment sales, the most immediate effects may be seen in parts demand."
Still, the weather has a way of confounding the forecasters. "I've not found an accurate way of predicting the weather. Even the groundhog seems to be wrong half the time," said Jim Miller, product manager, Goodman and Amana brand furnaces.
The NEWS interpretation: A warmer-than-usual winter could have a positive impact on consumer spending. If they are in a mindset to increase their home's value and save even more on their heating bills, and they remember the bite last year's heating bills took out of their budgets, a new furnace could be a welcome addition.
TIED INTO A/C INSTALLS
Both manufacturers and contractors have seen more sales of not just a heating or cooling system, but both at the same time. This has primarily been due to the changeover to larger, 13 SEER-and-up cooling systems."UPG has seen stronger-than-normal furnace and heat pump activity over the summer of 2006," said Mickey Smith, York brand manager and indoor products manager, Unitary Products Group, Johnson Controls.
"Carrier dealers have understood the value of system selling for years, so our furnace sales are always strong during the cooling season," said Tim Perry, manager of heating products, Carrier. "What has been unique this cooling season is our Hybrid Heat system sales, creating greater demand for heat pumps as compared to past summers."
"The Rheem [Ruud] Heating & Cooling Division's residential heating sales for the Eastern half of the United States are ahead of 2005 year-over-year sales through August," said Ken Geurian, director of sales, Rheem Air Conditioning, "with an expectation it will continue at this level through the rest of the year, even with the decline in residential new construction."
This summer also found more contractors installing both a/c and furnaces. "We replace the furnace along with the coil to ensure the fit," said Neil Marthedal, A.A. Marthedal Co. Inc., Fresno, Calif.
"Replacements are more justified this year than ever before."
"This is the first year where on about 88 percent of our jobs, we installed both the furnace and a/c system at the same time. Our total a/c sales were down but the total dollar jobs were higher," said Bob Forty, Energy Services Air Conditioning and Heating Co., Naperville, Ill.
"In a couple situations, we have had to have the customer replace the furnace to at least an 80 percent to gain the extra height needed," said Roger Fouche, Schaal Heating and Cooling Inc, Des Moines, Iowa.
"Everything is bigger, more expensive, and harder to install; we have dramatically raised our prices to allow for that. Sorry for the homeowner, but someone is going to pay for it."
Aladdin Heating and Cooling, a Lennox dealer in Warren, Mich., said the company experienced greater a/c and furnace sales last summer, due to consumer interest in replacing their cooling systems before the minimum efficiency legislation took effect. The company educated its customer base.
"We have not experienced unusual furnace sales [this summer]," said Karla Lynn, residential heating product manager, Rheem. "However, the shift from 80 to 90 percent AFUE is occurring at an accelerated rate. Higher fuel rates, federal energy tax credits, and greater consumer awareness of the higher-efficiency products available are drivers for this trend.
"In addition," Lynn said, "the U.S. government's energy tax credit program and local utility incentives are fostering awareness and sales for our higher-efficiency products."
Higher-efficiency cooling systems are driving consumer interest in higher-efficiency heating systems, the manufacturers all said.
"We've seen a positive impact," said Smith. "Matching indoor and outdoor coils is part of it. There's more awareness among consumers about the benefits of a total system upgrade, due to the good educational programs coming from our industry."
"Last year, we saw condenser sales pull through furnaces sales," said Miller. "This year, the 13 SEER minimum seems to be accelerating a shift to 95 percent AFUE and variable-speed furnaces."
"The 13 SEER minimum efficiency regulation has had a positive impact on furnace sales," said Geurian. "Most 13 SEER installations now typically involve a complete system replacement in an existing home. Most consumers who are changing out their outdoor unit are taking the opportunity to upgrade their indoor heating system."
The NEWS interpretation: Keep talking to consumers about higher-efficiency cooling, even if you are there for a heating call. The knowledge that cooling coils are larger than before may move a homeowner to get the new, smaller furnace instead of repairing the old one. Tax credits can help offset the cost.
2006 PRODUCT OUTLOOK
Will increased furnace sales continue this winter?"Overall furnace sales will probably level off due to the decline in housing starts," said Meyers. "However, shipments of 90-percent-plus-AFUE furnaces are expected to continue to increase in overall share.
"We see the furnace season overall as being similar to last year," she continued. "The housing industry slowdown and the cooling off of energy costs will likely not increase furnace sales over the normal replacement rate; however, the mix shift from 80 percent product to 90 percent product will continue and strengthen throughout the season."
"We expect furnace sales to continue to climb," said Smith. "New technology, like the York Affinity modulating gas furnace, should help drive sales as consumers look for ways to contain rising utility costs. Energy prices, severe weather - if it happens - and new technology all support the case for replacing older systems."
"We believe consumers will be inclined to replace old furnaces due to expectations of higher future natural gas prices and the federal tax credits for furnaces of 95 percent or higher AFUE," said Miller.
"Contractors should make sure they have a full line of products that qualify for the tax credits. We expect our Goodman Dual$aver and Amana TwinComfort two-stage (convertible) technology to drive the market to two-stage furnaces and continue to increase our sales."
"With the expected return of high natural gas prices, today's savvy consumers are looking for ways to save money on their utility bills," said Lynn.
"Many consumers will investigate a repair over a purchase. The determining factor will be the age, condition of their currently installed product, and the related comparative economics of old vs. new.
"For those that do replace instead of repair, a higher percentage will purchase 90-percent-AFUE models. Within that category, you will also see a shifting up from the 92 or 93 percent, to 95 percent and more two-stage or fully modulating operation."
"Recent utility rate increases that have impacted our Hybrid Heat system sales are more of a factor in furnace sales this summer than the 13 SEER minimum," said Perry. He said the company's Infinity furnaces and the Hybrid Heat system "should set the stage for vibrant furnace sales."
"Contractors need to be aware of changes taking place in their markets and prepare themselves for the change," said Gary Wehunt, manager Contractor Support Services, Rheem A/C. "They should be knowledgeable on their product offering and be prepared to explain the features and benefits of their offering.
"Contractors need to be prepared for shoppers who are much more informed and are armed with facts gained from online preshopping research," he continued.
"Beyond efficiency, consumers are interested in comfort levels, quiet operation, and eliminating hot and cold spots in their home. Contractors should focus on selling homeowners specific home comfort solutions, such as multistage or variable-speed products by explaining the benefits as they apply to them.
"Contractors should not forget to review the state of thermostat technology in the existing thermostat and recommend advanced thermostats that offer custom-tailoring for greater efficiency and comfort," Wehunt added.
"In addition, contractors should ensure that consumers are aware of any local gas utility rebates, and the $500 federal tax deduction that is available through 2007 on specific furnace models. They should be prepared to explain the features and benefits of a new high-efficiency matched system as opposed to older, less efficient systems."
The NEWS interpretation: The product is out there to help consumers make a positive improvement in their home expenses. The incentive to save money and improve the home's value is out there too. Ease of financing will be key to help them afford the system. Show them a realistic payback so it doesn't look like a long-term increase of debt.
Partnering with and advising homeowners is still the best way to gain their trust.
Publication date: 10/16/2006
