When the Thermostat Breaks, the Consumer Stops Being Discretionary

Consumer spending is still growing in 2026. Real GDP expanded 1.5% in the second quarter. Personal consumption continues to rise. And yet confidence is weak, payrolls turned negative in July, retail sales fell month over month, inflation is still running above 3%, and household debt delinquencies are ticking up. That combination is not a recession. It is something arguably more interesting for investors: a prioritization environment.

When consumers become selective, not all spending contracts at the same rate. Some categories stop being truly optional. A homeowner can skip a restaurant, pause a vacation, or defer a kitchen remodel. That same homeowner, when the central air conditioner fails in July, does not get to decide whether to engage the category. The house makes the decision for them.

That distinction, between spending consumers choose and spending the physical world imposes on them, is the lens through which we want to think about essential home services. This edition of Wind in the Willows explains why HVAC, plumbing, and electrical services deserve a fundamentally different economic framework than most consumer-facing businesses, and why we believe the current environment makes that distinction more valuable, not less.

The Consumer Is Not Collapsing. The Consumer Is Choosing.

The macro data as of August 2026 describe a consumer under pressure but not in freefall. GDP grew 1.5% in Q2, with consumer spending still positive. July payrolls came in at negative 23,000, with prior months revised down by a combined 103,000. CPI rose 3.4% year over year, with energy prices up nearly 15%. The Fed held its target rate at 3.50% to 3.75% in July and has shown no urgency to move. The Conference Board Consumer Confidence index fell again in July. Household debt stands at $18.8 trillion, with 4.7% in some stage of delinquency.

None of that individually signals collapse. Together, it signals that households are being asked to make harder choices about what gets funded. And when consumers make harder choices, history tells us something useful about what they protect. BLS data from 2009 showed total household expenditures fell 2.8% that year. Transportation dropped 11%, entertainment 5%, apparel over 4%. Housing expenditures fell a much smaller 1.3%. Healthcare actually rose. Households rank their spending, and physical necessity consistently ranks near the top.

The question for investors is which businesses sit on the protected side of that line, and why.

102 Million Systems Don’t Ask Permission

The most durable part of the essential home services thesis is not about consumer psychology. It is about physics.

Watsco, the largest distributor in the North American HVAC market, estimates approximately 102 million central air-conditioning and heating systems in the United States have already been in service for more than ten years. Typical mechanical life runs roughly 8 to 20 years. Replacement demand accounts for approximately 80% to 90% of residential HVAC equipment unit sales. The U.S. Energy Information Administration puts air conditioning penetration at 88% of U.S. households. These are not demand projections. They are an installed-base reality that exists independent of where the economy happens to be.

The housing stock reinforces this. Harvard’s Joint Center for Housing Studies published analysis in July 2026 showing that 48% of owner-occupied homes built before 1940 needed at least one repair in 2024. The U.S. housing stock reached a median age of 44 years in 2023, up from 39 years a decade earlier. A prolonged period of underbuilding during the Great Recession means this aging is structural. It continues regardless of interest rates or consumer confidence. Systems wear out. Pipes leak. Panels require service. The demand is embedded in the asset, not in the consumer’s mood.

Ferguson Enterprises, one of the largest distributors in the plumbing and HVAC supply space, estimated in its most recent annual filing that approximately two-thirds of its sales were tied to repair, maintenance, and improvement rather than new construction. It specifically flagged same-day and next-day availability as a key customer requirement, a detail that tells you something important about the urgency profile of this demand.

What 2008 Actually Showed, and What It Did Not

The cleanest historical test of this thesis comes from the housing collapse of 2007 to 2009, the most severe demand shock to U.S. residential construction in modern history.

In 2008, Watsco’s same-store revenue fell 10%. That sounds bad on its own. The detail that matters is the split: residential replacement demand was flat that year. Commercial declined at a single-digit rate. New housing fell sharply. The same pattern held in 2007, when Watsco reported growth in its residential replacement market even as new home starts in Florida, Texas, and California had fallen more than 40% over two years. Equipment that fails needs to be fixed or replaced. That need did not disappear because homebuilding slowed.

The next data point is equally important for honesty. In Q1 2009, during the worst phase of the recession, Watsco’s overall revenue fell 23%. Essential home services businesses are not immune to severe economic downturns. What the data shows is not immunity, it shows differentiated behavior. The demand profile is structurally different from businesses where consumer confidence alone drives the purchase decision. That difference matters a great deal when you are underwriting a company through a cycle.

The practical implication is this: a business that earns most of its revenue from emergency residential repair and recurring maintenance agreements will behave very differently in a downturn than one that is heavily exposed to new home installations or elective upgrade projects. Both might be described as “home services.” They are not the same investment.

The Local Moat Is Real, But It Has to Be Built

Recognizing that essential home services have a structural demand floor is the beginning of the investment thesis, not the end of it. The category creates the opportunity. The local operator determines who captures it.

Eighty percent of homeowners today begin their contractor search online before they make a call, according to industry research. That means legacy customer relationships and word-of-mouth alone are no longer a sufficient competitive position. Digital reputation, response time, online booking, and financing availability are now part of the equation alongside technical quality. Research from the trades indicates that homeowners who have access to financing close at meaningfully higher rates and spend more when they do.

The labor constraint adds another layer. BLS projects roughly 81,000 annual electrician openings and 40,000 annual HVAC technician openings over the next decade, at a time when trade enrollment is not keeping pace with demand. A company that recruits, trains, retains, and dispatches technicians more effectively than its competitors is not just a better employer. It is building a capacity moat that directly limits what competitors can do in the same market. In a category where demand is structurally persistent, the ability to answer the phone and show up is itself a competitive advantage.

Frontdoor, whose annual home-service plans cover HVAC, plumbing, and electrical systems for more than two million homeowners, reported a customer retention rate of 79.6% as of mid-2026. Frontdoor is a warranty platform rather than a local contractor. The comparison is imperfect, but the figure is a useful signal that homeowners who have organized their essential home-service relationships tend to maintain them year after year. The recurring nature of that relationship is something a well-run local operator can build a business model around.

How We Think About Demand Quality When We Underwrite

The most important lesson from this framework is that a category label tells you very little about what you are actually buying. Two businesses with identical descriptions can have radically different cyclicality depending on their revenue mix.

The question we find most useful in diligence is a simple one: what caused the customer to pick up the phone? A failed compressor in August, an active water leak, a panel that has stopped working, those are demand events the homeowner did not choose. They sit at one end of the spectrum. An elective kitchen remodel, an optional efficiency upgrade, or a cosmetic fixture replacement sits at the other. Both can be described as “home services.” Only one of them behaves like a non-discretionary purchase when household budgets tighten.

This demand-quality framework extends well beyond the pure-play home services trades. The same logic applies to any business where a portion of revenue is driven by the unavoidable maintenance of physical assets, equipment, infrastructure, systems, or structures that age and fail on their own schedule regardless of consumer confidence. The specific industry matters less than the revenue mix. We look for businesses where most of what is being sold was pulled by necessity, not pushed by marketing.

In the current environment, with rates elevated, homeowners staying in existing homes longer, the housing stock aging, and consumers becoming more selective, the businesses that sit closest to that non-discretionary demand floor are, in our view, the most interesting places to look. Not because they are immune to pressure, but because the reason the customer calls survives longer than the consumer’s appetite for optional spending. That durability is what we are trying to own.

A Final Word on Framing

We want to be precise about what this thesis is and is not. It is not a claim that essential home services businesses never decline. Watsco’s own 2009 results make that case impossible to sustain. It is a claim that the demand profile of a well-positioned repair, maintenance, and replacement business is structurally different from a discretionary consumer business, and that structural difference becomes most visible, and most valuable, exactly when the macro environment creates the kind of selectivity we are seeing today.

The businesses that will perform best through the back half of 2026 and into 2027 are not the ones hoping for a rate cut or a confidence rebound. They are the ones where the phone rings because it has to. That is what we are building toward, and that is the framework we bring to every services deal we evaluate.

— The Willow Creek Partners Team