It sounds possible that your landlord's house is being foreclosed upon. Check the sale notice - is it a sale for foreclosure, or for unpaid back taxes?

You should consult a local lawyer before you withhold rent, but I would be wary of paying any rent to your landlord before you figure out what is going on with the house. You may be able to commence a court action for a rent abatement due to the broken water heater, and have the court hold your rent in escrow - if so, assuming your jurisdiction is typical of the nation, as long as you make your rent payments to the court on time you should be safe from eviction for nonpayment. (You would also develop a pool of money from which you could recover your damage deposit - if the house is being foreclosed, I would not count on getting it back from the landlord.)

However, you indicate that you are on a month-to-month lease - if the house is sold, the new owner may wish to take occupancy, or to raise your rent. You may wish to start exploring other housing options, "just in case".