What The Housing Slowdown Means For HVAC Demand  

The cooling of the housing market has been one of the biggest drags on HVAC replacement activity. While new construction historically represents 20-25% of residential air conditioning demand, it’s not the primary engine of HVAC sales.  

Tim Fisher, director of market intelligence at HARDI, said that over 90% of homes have an installed a/c or heat pump system, but service and replacement activity is what drives the market.  

For HVAC contractors, the trajectory of existing home sales is critical because it remains the strongest predictor of service and replacement volumes.  

“We lean a lot on trends in the existing home sales market to understand trends in replacement demand because, historically, the two are closely linked,” said Fisher. “Purchasers of existing single-family homes spend more on their home than a similar non-moving homeowner (per research from the National Association of Home Builders), and that includes spending on HVAC system upgrades. We’ve also found that over time, one percentage point increase (or decrease) in existing home sales nationally is correlated with a 0.5 percentage point increase (or decrease) in distributor sales volumes.”   

That connection has been tested over the past two years. Rising interest rates, a shrinking pool of sellers, and tight inventory have weighed down the housing market. But, based on the economic trends seen prior to the government shutdown, a rebound in existing home sales in 2026 was anticipated.   

“Last year, total existing home sales were at their lowest level since 1995, and year-to-date (through September), growth in home sales is flat relative to last year,” Fisher said. “A lot of this has to do with the lock-in effect of low mortgage rates — more than 80% of homeowners have a mortgage rate less than 6%, and the national average on a new 30-year fixed mortgage has been above 6% since late 2022.”  

HARDI expects existing home sales to improve in 2026 as mortgage rates drift down from the elevated levels seen since late 2022, driving that rebound in existing home sales.    

New construction is less encouraging. Residential permits trended downward through the summer, and HARDI saw no clear sign of a pickup coming in 2026 based on the data available before the shutdown.   

“That means likely another year of slow sales opportunities for residential distributors and contractors with a new construction focus,” Fisher said.   

Construction Sector Split: Public And Private  

At the Plumbing-Heating-Cooling Contractors Association (PHCC) Connect event in Grand Rapids, Michigan, Elliot Eisenberg, president and chief economist of Graphs and Laughs, said construction activity is actually really good.  

“Despite the fact that manufacturing is in a recession and capacity utilization rates are low, there’s tons of construction going on, which is totally unexpected,” Eisenberg said.  

This is due to a few reasons: the bipartisan infrastructure law, President Biden’s CHIPS bill that boosted semiconductor manufacturing, and the Inflation Reduction Act (IRA). Eisenberg said while the IRA did nothing to reduce inflation, it did encourage all kinds of green energy.  

And now that all of those factors are ending for one reason or another, there’s artificial intelligence (AI).   

“For a while, there were no homes to sell because everybody had a 3% mortgage,” Eisenberg said. “So we were building homes like crazy, even though rates were high. This is very weird. Our economy is both fine and frayed.”  

Being both fine and frayed is because the strength in construction is uneven. According to data shared by Eisenberg with PHCC Connect attendees, public construction — roads, airports, water infrastructure, police and fire stations — remains the only consistently growing segment. Private non-residential categories, including office, retail, hospitality, and single and multifamily, are mostly flat or declining.  

For mechanical contractors, the split between the public and private sectors is already influencing where the most reliable HVAC scopes are emerging — in public-sector retrofits, schools, municipal buildings, airports, and water infrastructure projects, rather than in private commercial builds.  

One boom for HVACR contractors is data centers. Data centers are among the most HVAC-intensive project types in the market, with enormous cooling, redundancy, and controls requirements — giving contractors a rare bright spot in an otherwise cautious nonresidential landscape.  

According to data from the American Institute of Architects (AIA), they’re up 33%. Eisenberg noted that the Dodge Momentum Index is being propelled by data-center and power-generation projects tied to the AI boom.   

Still, overall private-sector building remains strained. Eisenberg said real estate lending growth is running below inflation, and banks are demanding far larger equity contributions than in previous years — sometimes up to 50%.  

“Real-estate lending growth is below the 2.5 rate of inflation,” Eisenberg said. “It’s 1.3 — no one’s lending. You want to build an office tower? I don’t think so. You want to build a low-end hotel? Nope. You want to build multifamily? Not today — not, at least, with the bank’s money. And if you want to borrow their money, they’ll lend it to you, but you’re gonna have to come to the table with a lot more than 20% down.”  

And at that point, the math doesn’t math. Economically, these become projects that are no longer viable. While total construction spending seems to be declining, it’s not really enough to matter, Eisenberg said.   

These construction patterns determine how many new HVAC systems are installed — but they also shape how much contractors will rely on renovation work and long-term maintenance agreements to drive revenue.  

Residential Construction Trends To Watch  

For distributors and contractors, the key question is whether loosening mortgage rates and improving sales activity can translate into higher HVAC volumes.  

Since COVID, single-family home construction has essentially declined. That’s because home prices keep going up, and builders are reluctant to build entry-level homes.  

“There aren't enough homes being built, so we're currently short on homes,” Eisenberg said.   

Meanwhile, multifamily construction, which surged during the pandemic as household formation accelerated and rents soared, has now hit a wall.   

“Demand for apartments went crazy, and interest rates were low, so a lot of units were built,” Eisenberg said. “So multifamily goes up, then suddenly rates go up — we stop building. Now, home prices are so expensive no one can afford to buy a house — so let’s rent an apartment.”  

Now that rents have flattened or declined in many markets, there’s an oversupply in the short run of multifamily, making lenders even more hesitant to finance new projects.  

One area that has held up is renovation, alteration, and repair. Homeowners locked into low mortgage rates are choosing to stay put longer, and Eisenberg said many are investing in remodels, additions, and upgrades. That trend supports ongoing residential HVAC work even as new construction softens.  

Residential Market Growth  

In a more normal year (meaning without A2L and tariff uncertainty), Fisher said the industry should expect some growth in overall residential HVAC demand.   

“However, a big open question remains the extent to which tariffs and affordability will impact consumers’ willingness to spend next year,” Fisher said.   

HARDI currently forecasts 2% to 4% growth in distributor volumes next year, though the prediction is largely based on data that was available through August (due to the shutdown).   

Demographic trends also serve as clues to how this market will perform over the next year. Though an overall population decline, Eisenberg pointed to strong and sustained population growth across the South — particularly the Carolinas, Tennessee, Georgia, and Florida — as well as Texas metros including Austin, San Antonio, Houston, and Dallas. Parts of the Intermountain West are also growing quickly. Population growth typically precedes stronger housing demand, higher construction volume, and more HVAC installations and service activity.  

“That's where population growth is,” Eisenberg said. “If you're looking for where to expand, where to grow, where to build, where things are going to be better — it's where people are moving.”  

Economic Pressures   

As for next year, contractors should expect economic friction to continue. Material cost inflation remains a challenge.   

“The cost of input — what the builders and developers are paying — there’s a 43% increase in the cost of inputs,” Eisenberg said. “We're not including labor, we're not including land or permits — they're also more expensive. So it's much more difficult to make projects pencil out now than it was five years ago.”  

For HVAC contractors, these same pressures squeeze bid margins, influence equipment pricing, and complicate project forecasting going into 2026.  

Eisenberg said recent increases appear tied partially to tariffs on steel, aluminum, lumber, cabinetry, and other materials. These pressures can eventually lead to changes in HVAC equipment pricing as well.  

Labor shortages are another persistent constraint. Eisenberg highlighted demographic decline and immigration disruptions as factors limiting the available workforce in construction and other industries.   

The HVAC industry will continue to feel this acutely; contractors already report difficulty finding installers and licensed technicians, and stronger demand in 2026 could widen the gap.  

Interest rates will play a pivotal role in shaping 2026. Eisenberg expects the Federal Reserve to continue trimming rates, potentially cutting again around the end of this year and several times in the first half of next year.   

“Follow inflation, because the Fed does,” Eisenberg said. “But watch unemployment, because if they're both going up, the Fed will cut rates.”  

Lower rates can revive both residential upgrades and large mechanical projects, but contractors may still face a slow start to the year before demand picks up.  

Preparing For 2026  

Taken together, these economic and construction trends give HVAC businesses a clearer view of where opportunities — and risks — will show up next year.  

For contractors and distributors, the message is to plan for a year that is better — but not necessarily booming. Residential HVAC demand appears to have reached its bottom, with replacement activity and improving existing home sales offering the strongest peaks. New construction will likely remain subdued, and private commercial work will stay selective.  

“Because of how closely intertwined residential HVAC demand is with the housing market, the post-COVID slowdown in the housing market has put the brakes on HVAC demand,” Fisher said. “While I certainly don’t want to say that it can’t get any worse, I’d be very surprised to see further deterioration in the housing market. Consequently, I see the current levels of resi-HVAC demand as at or near the lowest levels distributors and contractors should expect.”  

Public-sector infrastructure, data centers, and renovation work are expected to provide the most stable opportunities for HVACR contractors.   

Fisher urged HVAC businesses to manage for profitability, track affordability pressures closely, and avoid overcommitting in an uncertain economic environment.  

“Our general view of the market next year is one of cautious optimism — demand opportunities should grow relative to 2025, but HVAC businesses should manage for profitability and budget conservatively,” Fisher said. “The economic picture is incredibly uncertain right now, and the lack of recent market data is compounding that problem.”  

While 2026 may not deliver a full recovery, it is shaping up as a turning point — one where HVAC companies can begin moving from defense to cautious, strategic growth.