As the world grapples with the impacts of the COVID-19 pandemic, a curious trend has surfaced in the housing market. Researchers from the University of Texas at Austin have found a compelling link between an unexpected source – fraudulent Paycheck Protection Program (PPP) loans – and the significant surge in home prices.

The Federal Reserve reported that home prices rose by approximately 24% in 2020 and 2021, driven by factors such as the influx of cash buyers, investors, and individuals seeking new homes in the wake of the work-from-home trend. However, the study conducted by John M. Griffin, Samuel Kruger, and Prateek Mahajan reveals that PPP loan fraud also contributed to this inflation.

Dr. Sam Kruger, Assistant Professor of Finance at the University of Texas at Austin McCombs School of Business, emphasized this point, stating, “If you look at the zip codes that have the highest decile of PPP fraud, and compare those to zip codes with the lowest decile, there’s something like a six percentage point difference in their house prices.”

The Federal government’s PPP initiative released a whopping $793 billion in loans to support businesses throughout the pandemic. A worrying 14% of this, amounting to $117 billion, has been flagged as suspicious by the UT researchers. The fraudulent use of these funds has had substantial impacts on certain regions.

“High levels of PPP loan fraud correlated with inflated housing prices in cities such as Chicago, New Orleans, and Atlanta, where fraud rates approached 30%. Home prices in these areas were 5.7% higher than in areas with lower levels of fraud,” said Kruger.

The implications are far-reaching and complex. Houston, for example, was shown to be one of the regions in Texas with the highest rates of PPP fraud, which has contributed to home prices rising 20% to 25% more than the average.

The research also suggests that fraudulent activity wasn’t restricted to PPP loans. High levels of fraud were also identified in the disbursement of unemployment benefits and other forms of pandemic relief in the same regions.

As legal authorities begin prosecuting fraudulent cases, a pertinent question arises: can recouping the stolen money alleviate the surge in housing prices? Unfortunately, as Kruger explains, “The sad fact of the matter is that of the hundreds of billions of dollars that were stolen, we’re unlikely to get back very much of that.”

This research not only shines a light on the unintended consequences of relief measures but also underscores the necessity for more rigorous oversight and accountability in the disbursement of such funds. It remains to be seen how this revelation will influence the trajectory of the housing market and inform future relief efforts. But for now, the complex web between PPP loan fraud and inflated home prices continues to unravel, offering valuable lessons for policymakers and stakeholders alike.