Most custom homes wouldn't be complete without a 70- to 100-gallon whirlpool tub and a high-output, jetted shower system in the master bathroom—plus showers and tubs in other bathrooms and large-capacity washers and dishwashers. All these systems and appliances can put a severe strain on a standard water heater, and even the largest capacity water heater tank has a recovery period once it runs out of hot water.

Tankless water heaters offer several advantages over conventional units: energy efficiency, a constant supply of hot water, and space savings. They are installed in most zero-energy houses, and many other dwellings.

For the builder or remodeler, there are benefits as well. “This is an opportunity to upsell to a more expensive appliance,” points out Kyle Murray, vice president of marketing for Controlled Energy, a tankless water heater manufacturer. “The other advantages from the builder's standpoint are the space savings and the opportunity to offer an energy-efficient appliance.”

These systems are relatively straightforward. Instead of continuously drawing on energy resources to heat, store, and reheat water in a tank, tankless systems flash-heat water as it is needed by passing it through a copper heat exchanger. When a hot water tap is turned on, a flow sensor signals the burners to fire.

“When the tap is turned off the entire unit shuts down, and there is no standing pilot,” says Tiffani Thompson, Rheem Water Heaters' specialty products sales manager.

In addition, there is no recovery period. “You can save 40 to 60 percent on the water heating portion of your gas bill,” says Brad Monaghan, East Coast sales manager for Takagi.

Furthermore, the systems are compact and can be either surface- or flush-mounted to an interior or exterior wall, freeing up floor space.

Sizing the unit appropriately is critical for optimal performance. Some manufacturers claim that a single high-capacity unit easily can supply an entire house's hot water needs, while others recommend zoning two units in larger structures.

Because tankless systems are designed with sealed combustion, they can be installed in closets or walls as long as they are properly vented.

During the past few years, tankless water heaters have had 20 percent to 30 percent sales increases per year, Murray says. Still, they account for only 2 percent of the overall residential water heater market, says Richard Ponce, national sales manager for Noritz.