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Looser credit could refurbish sales at home improvement retailers

Inside A Home Depot Store Ahead Of Earnings FiguresInside A Home Depot Store Ahead Of Earnings Figures
Big-ticket items were big sellers for Home Depot early in the new fiscal year.Photograph by Patrick T. Fallon — Bloomberg/Getty Images

A late spring this year has lifted home-improvement retail sales out of the winter doldrums, and there could be more growth ahead.

Easing lending standards and a pickup in loan demand are potential tailwinds that can boost sales so Home Depot and Lowe’s in the coming months, meaning the retailers aren’t at the mercy of fickle Mother Nature.

Earlier Tuesday Home Depot (HD) reported better-than-expected profit and sales growth for the fiscal second quarter. Results were bolstered by strong sales of big-ticket items — results Chief Executive Frank Blake said support the view of “a continuing recovery in the U.S. home improvement market.”

Of course, pent-up demand after a harsh winter pushed some sales back into the spring months this year. But beyond that, credit conditions are a key factor. Because Home Depot is so closely tied to the housing market, it’s important that customers have available credit to purchase homes (which tends to lead to renovations), buy large items such as refrigerators, and for professionals to buy gear for their housing projects.

Home Depot’s Chief Financial Officer Carol Tome told analysts that approval rates for the company’s private credit cards have increased for both consumers and professionals. Average credit lines are about $5,800 for consumers and $6,900 for professionals — and Tome said that credit is often used as a financing tool for its customers to make big-ticket purchases.

Amid the strength of the housing market and greater access to credit, Home Depot reported second-quarter sales were strong for big-ticket purchases of appliances, windows, water heaters and flooring. Home Depot’s same-store sales at U.S. stores climbed 6.4% in the quarter. Rival Lowe’s (LOW) is projected to report an overall increase of 4.1% when it delivers its results on Wednesday, according to a survey by Consensus Metrix.

A recent Federal Reserve survey of senior loan officers highlights what Home Depot has also seen: a broad pickup in loan demand and easing lending standards for many loan categories. For example, 24% of those polled by the Fed say credit standards have somewhat eased for prime residential mortgage loans over the past three months. That’s an improvement from just 13% in the prior period.

Observers say that tight lending standards have been one of the biggest factors holding back the housing recovery, as banks are fearful about the litigation and fines they’ve faced as a result of the fallout from the financial crisis. And while credit conditions continue to improve, Home Depot indicated more can be done, particularly to help the Millennial generation.

“There is something like a third of people aged 18 to 36 living at home with their parents,” Tome said. “Something has gotta move on mortgage financing reform.”

Canaccord Genuity analyst Laura Champine said Tome has called for mortgage financing reform and advocated for greater homeownership among younger adults for a while. Tome, in an interview with Fortune, said Millennials “carrying around all that student debt are not qualifying for mortgages — that needs to change.”

The feds seem to be paying attention. The Wall Street Journal in May reported the Obama administration and federal regulators are reversing course on some of the biggest efforts to tighten mortgage-lending standards in the wake of the Great Recession. And while Millennials are stuck with some weak job prospects and muted income growth, some housing executives say first-time homebuyers are returning to the market.

But Home Depot and Lowe’s may be waiting a bit longer before they can count on meaningful demand from home-buying Millennials.

“The Millennial generation has a lot more student debt and is waiting longer to get married, and that is pushing out or slowing the rate of recovery,” said John Lloyd, global head of credit research at investment firm Janus Capital Group.