A home energy management (HEM) system is an integral part of a smart grid that can potentially enable demand response applications for residential customers. This paper presents an intelligent HEM algorithm for managing high power consumption household appliances with simulation for demand response (DR) analysis. The proposed algorithm manages household loads according to their preset priority and guarantees the total household power consumption below certain levels. A simulation tool is developed to showcase the applicability of the proposed algorithm in performing DR at an appliance level. This paper demonstrates that the tool can be used to analyze DR potentials for residential customers. Given the lack of understanding about DR potentials in this market, this work serves as an essential stepping-stone toward providing an insight into how much DR can be performed for residential customers.