The residential heat pump market is affected by a range of forces, from incentive programs to improvements in technology to the trend among some homeowners toward remodeling their homes rather than buying new ones.
Jeff Underwood keeps track of those market forces.
Underwood, the president of RectorSeal Corp., briefed HVACR distributors on the heat pump market during the recent Heating, Air-conditioning & Refrigeration Distributors International (HARDI) conference in Atlanta. An HVACR industry veteran, Underwood has been with RectorSeal for six years, worked for Goodman Manufacturing (a Daikin Group subsidiary) for five years, and also worked as a consultant which, he said, gave him a chance to visit contractors around the country and learn about the challenges they face and what keeps them going.
‘Dramatic Rise’
While different facets of the U.S. residential heat pump market have grown at different rates, Underwood said, there’s been a significant overall increase in the installation of heat pumps in the U.S. in the past 20 years. In 2004, he said, heat pumps made up about 25% of all installations of compressor-bearing equipment (in other words, a/c units and heat pumps). By 2023, that proportion was at about 42%.
“No matter how you slice it, we have seen a dramatic rise that is consistent,” he said.
Ductless mini splits, rather than ducted systems, Underwood said, account for much of that increase. Ductless systems have been especially popular in Mid-Atlantic and Northeastern states, and demand for RectorSeal products that are used with ductless systems bears that out, he said.
“The Mid-Atlantic and the Northeast have seen a dramatic rise in the usage of mini splits,” Underwood said. “We’ve experienced it with our own business. When we go ahead and look, a lot of our ductless accessory sales are booming in the Mid-Atlantic and Northeast regions.”
Overall heat pump adoption, including both ducted and ductless systems, is particularly high in the Southeast and the South, he said.
“You are starting to see a little bit of an uptick in the Great Lakes, in the Central region, areas that have much colder climates,” Underwood said.
Anecdotal evidence, he said, suggests heat pumps are also gaining popularity in the West, especially in California, which has been aggressively pushing heat pumps as part of its decarbonization efforts.
“We’re waiting to see the actual data, but heat pumps in California are starting to shift, especially as the state has a concerted effort to go ahead and drive heat pump adoption,” Underwood said.
Why the steady increase in heat pump adoption? Improving technology, according to Underwood: Much better efficiency ratings, and cold-climate technology that enables systems to work at much lower ambient temperatures without backup heating.
“You’re seeing a much broader range of performance that a heat pump can handle that does not require alternative technology to go ahead and supplement that heating,” he said.
Applications and Opportunities
In “broad strokes,” as he called them, Underwood put homeowners’ heat pump purchases into four categories: New construction, HVAC system changeouts, home renovations and additions, and the replacement of less-common “alternative” heating systems, such as baseboard systems.
New construction, he said, has a moderate market attractiveness for heat pumps, but has also seen steadily increasing adoption of heat pumps over many years. In 2000, Underwood said, about 23% of new homes were being outfitted with heat pumps; more recently, he said, that number has reached nearly 45%.
“Very good inroads being made in the new construction space,” he said.
That’s because in new construction, contractors are able to start from scratch with the system and ductwork have the home wired properly, instead of having to shoehorn in a system retrofit, Underwood said. New construction also represents perhaps the best opportunity for selling ducted systems, he said.
But system changeouts, Underwood said, while representing an estimated 60% to 70% of overall residential HVAC system sales, have a low market attractiveness for heat pumps.
The costs associated with introducing a heat pump into a home that previously had another type of system — costs such as electrical work and duct renovations (or new ductwork, in cases where the home hadn’t had ductwork) — are disincentives for many homeowners and contractors. Homeowners who are used to the kind of heat produced by gas furnaces, or who are wary of rising electric bills, may also shy away from heat pumps, he said.
“The economics today of that changeout market are just not compelling for anyone in the value chain to invest in,” he said. “And so you see this change-up market being the biggest … but also the biggest impediment to go ahead and try to drive adoption,” Underwood said.
A “bright spot” in the changeout category, he added, is that a subset of homeowners are looking for climate resiliency for their homes and are showing interest in dual-fuel systems. Several distributors, he said, have told him they’ve seen that interest grow in the last two years or so.
“It’s definitely something to keep an eye on in each respective market,” he said.
Home renovations and additions, Underwood said, represent only about 10% of the market, but also have a high attractiveness for heat pumps.
“This is the place that the heat pumps, especially the mini split, have been dominant,” he said. “When you get down to it, the remodel/add-on space is a place that you’ve seen the various OEMs for ductless manufacturers talk most positively around the economics of the application.”
Mini-splits are more popular for home remodeling and additions, he said, because they don’t present as many electrical issues, don’t involve ductwork, and offer more precise airflow in specific areas of a home in ways that ducted systems can’t always compete with.
Underwood’s last category, the replacement of less common systems, has a moderate market attractiveness for heat pumps, he said. But there’s a good economic case to be made for heat pumps, in terms of energy and utility bill savings, when comparing them to technologies like electric baseboard heating, he said.
However, the upfront costs of heat pump installations can be high, Underwood added, and their adoption in this category is driven by a “choice to invest.”
Incentive programs, he said, are helping. Underwood highlighted the Mass Saves program in Massachusetts, which, he said, has led to about 100,000 heat pump installations, plus home weatherization and other energy-saving measures.
“What is really trying to get to is … lower the initial investment cost to get to a heat pump, so the savings from a reduced electrical bill over time can go ahead and make it much more compelling not to have baseboard heating or some of the alternative technologies,” he said.
Key Market Indicators
In closing, Underwood recommended distributors pay attention to four indicators as they decide how much involvement in the heat pump market they want to have:
• The cost gap. The equipment for a heat pump system costs about 15% more than for a gas or oil furnace with an a/c unit, Underwood said. Federal policy around things like Inflation Reduction Act (IRA) incentives, trade and tariffs, and changing Energy Star requirements could reduce or increase that gap.
“I’d be kind of watching that kind of gap to say, ‘Hey, what does it cost in terms of the new system? At what point are we going to tip to where it is less costly to put in a heat pump versus a/c-gas furnace?’ ” he said.
• The federal regulation that will begin to phase out noncondensing gas furnaces beginning in late 2028. Underwood sees that as a tipping point for heat pumps.
In some warmer climates, he said, gas furnaces are rarely used; Underwood suggested that homeowners in those areas won’t want to replace a furnace with a more expensive condensing model plus new a/c and will opt for a heat pump instead for heating and cooling.
“It’s going to see a shift to where my prediction would be that a heat pump is going to be more cost-effective than an a/c coil and condensing furnace,” he said.
• New technology. Improvements to heat pumps will increase their ability to provide comfort and precise control options, and decrease the need for new home wiring, Underwood said.
“You’re going to consistently see each year that the newest heat pumps are going to get better and better and better,” he said.
• The refrigerant change. With R-410 being phased out, Underwood said, it’s going to get more expensive, affecting how existing a/c systems are repaired and recharged. That, he said, should push homeowners in the direction of heat pumps, which will be made to use newer low-GWP refrigerants, as replacements.