I doubt that it is the thermostat, unless the water was absolutely cold at the 120 degree setting. It sounds like there is a piping problem but cannot tell what from a distance. Do you have a tempering mixer valve at the water heater? : My husband installed out new water heater but the highest temperature the water that is coming out of the pipes is 120 degrees and he has the heater above the maximum tempurature which is 160. Nothing is leaking and the pipes are connected right. We have Gas heat the pilot light is on. What is your suggestion?