Pandemic Loan Fraud Pumped Housing Prices

Shady borrowers milking COVID-19 relief programs bought houses, inflated home prices, and hurt consumers

Based on the research of Samuel Kruger, John Griffin, and Prateek Mahajan

For Americans dreaming of owning a home, this decade has been brutal. From the end of 2019 to the end of 2022, the median sales price for homes sold in the U.S. soared 35%, according to the Federal Reserve Bank of St. Louis. It’s dipped only slightly since then.

Economists have blamed much of the surge on the COVID-19 pandemic, when people migrating from large cities to smaller ones drove up prices.

But new research from the McCombs School of Business at The University of Texas at Austin uncovers another, less visible cause: financial fraud.

Samuel Kruger, associate professor of finance; John Griffin, James A. Elkins Centennial Chair in Finance; and doctoral student Prateek Mahajan found that fraud in government-funded pandemic loans explained 22.5% of the average increase in housing prices during 2020 and 2021.

Fraud harmed not only taxpayers but also homebuyers, Griffin says. “It hurt individuals who bought houses at inflated prices. Fraud can have large unintended consequences.”

Hasty Distribution and Unintended Consequences

The $793 million Paycheck Protection Program (PPP) was created to support small businesses during the pandemic. Although the federal government put up the money, third-party intermediaries such as banks and fintech companies made the loans.

In its haste to get money to struggling companies, the program’s design did not contain adequate safeguards or incentives for those intermediates to prevent fraud by borrowers, Kruger says. An earlier study by the three researchers flagged at least $117 billion in suspicious lending and was cited by a congressional committee.

But they suspected fraud had secondary victims beyond Uncle Sam. They knew that questionable PPP loans were geographically concentrated, accounting for as much as half of all loans in certain areas.

How were those borrowers spending that money? The researchers looked at house purchases by buyers suspected of PPP fraud in 18,761 ZIP codes, which collectively include 93% of the U.S. population. They found:

• In 2020-21, ZIP codes with the greatest concentrations of fraudulent lending experienced house price growth 5.8% higher than those with the lowest concentrations of PPP fraud.
• Suspected fraudsters were 17% more likely than average to buy a house.
• The impact was over 30% greater in areas where housing was already tight.

Fraud, in fact, had a greater impact on pandemic-era housing prices than did other factors such as remote work and migration.

“That’s where real people get hurt by this,” Kruger says. “If you’re just a regular homeowner, and you happen to purchase in one of those areas in 2021 or 2022, you probably purchased at an inflated price. As that excess demand comes off the market, you’re going to expect to lose money on the house.”

Scammers didn’t just spend money on houses, the researchers found. PPP fraud was related to a 2.8% increase in auto title registrations, as well as more visits to grocery stores, furniture stores, restaurants, and financial institutions.

Call for Caution

Further macroeconomic effects of pandemic-era fraud could be yet to come, Griffin says. He notes that the 2008-09 financial crisis was caused in part when inflated housing prices led to mortgage defaults and a banking crisis.

To prevent possible replays in the future, Kruger says government loan programs should be designed more carefully from the start.

“Our findings show fraudulent transfers can be wealth shocks that generate economic distortions not created by normal transfers,” he says. “Future government program designs should take more proactive steps to prevent fraud on the front end.”

“Did Pandemic Relief Fraud Inflate House Prices?” is forthcoming in the Journal of Financial Economics.

Story by Suzi Morales