Pandemic Relief Money Linked to Soaring U.S. Housing Prices

In the wake of the pandemic-induced recession, the U.S. housing market experienced a rapid surge in prices, driven by a combination of factors such as limited inventory, pent-up demand, and consumers seeking more living space. However, a new study conducted by researchers at the University of Texas suggests that another significant factor contributing to the soaring prices may be billions of dollars in stolen pandemic relief money from the Paycheck Protection Program (PPP).

The PPP, a government initiative aimed at providing forgivable loans to businesses that retained their workers and maintained payroll during the pandemic, distributed about $780.4 billion to over 10 million businesses between April 2020 and May 2021, according to government data. Unfortunately, the program also became a hotbed for fraudulent activities, leading to a potential loss of at least $20 billion in government funds, as projected by the inspector general of the Small Business Administration. Earlier estimates from the University of Texas put the figure even higher, at $116 billion.

Sam Kruger, a finance professor at the University of Texas and co-author of the study, expressed concern over the magnitude of this fraud and its potential spillover effects on the economy. He noted that the fraudulent pandemic relief funds could have flowed into specific geographic areas, potentially amounting to hundreds of billions of dollars.

Home prices experienced a staggering 24% jump in the two-year period between November 2019 and November 2021, largely attributed to the massive shift to remote work brought on by the pandemic. However, the latest research reveals that PPP fraud might have played a role in the price surge in certain regions, as individuals who obtained illicit PPP money were more likely to use it to purchase homes.

The study found that ZIP codes with a high concentration of PPP loan fraud witnessed house prices that were 5.7% higher than those in low-fraud ZIP codes, even when both were situated within the same county. The authors of the research paper asserted that this effect was substantial compared to other proposed factors explaining house price growth during the COVID-19 period. The study accounted for various variables, including land supply, prior house growth, population density, net migration, and distance to central business districts.

Kruger emphasized the multifaceted impact of PPP fraud, noting that the direct cost of lost funds from the Treasury Department and taxpayers was significant. However, he stressed that the consequences extended beyond the direct cost, as fraudulent buyers competed with legitimate buyers, driving up housing costs and causing regular individuals, who were not involved in the fraud, to pay inflated prices for homes.

The study sheds light on the far-reaching implications of PPP fraud on the housing market and serves as a call for greater vigilance and scrutiny to prevent future instances of financial misconduct during times of crisis. As the housing market continues to evolve, experts and policymakers must address these concerns to ensure the market’s integrity and affordability for all potential homeowners.