Housing prices in the U.S. have exploded since the pandemic first began. There are a number of reasons economists point to for that: increased demand, building delays worsened by supply chain issues, and institutional investors buying up supply.
Now, a study from the University of Texas at Austin suggests another culprit may be at least partially behind the rise in housing prices: Paycheck Protection Program – or PPP – loan fraud.
John Griffin, the James A. Elkins Centennial Chair in Finance at UT Austin’s McCombs School of Business, spoke with the Standard about why fraud drove up prices.
This transcript has been edited lightly for clarity:
Texas Standard: Folks probably remember these PPP loans. They were limited in supply but were supposed to help folks with businesses directly impacted by the pandemic. What are some examples of PPP fraud?
John Griffin: Well, the type of PPP fraud that we captured is not just people getting loans that didn’t need the loans. We focused on what might be considered measures of outright fraud, like people that don’t have businesses getting loans. Also, people claiming that they have 10 jobs in one government program, and in another government program saying their business only had one job.
We saw a lot of patterns where people were just using exactly the same loan features and getting many, many loans in a zip code for, let’s say, hairdressers, when there’s only so many hairdressers in the county.
More recently you looked at how that fraud has caused inflation in home prices. So how did that work?
Well, basically, we found some very interesting patterns on the fraud that concentrated in certain parts of the country, and in particular even in certain counties – and within those counties, certain zip codes. So because the fraud concentrated so heavily, we ask ourselves, well, what did those people do with all that money – $117 billion that if you actually had a legitimate business and you were taking the money to pay payroll, then you would be using it on legitimate expenses. And it’s just offsetting expenses; that’s the way the program was designed to be implemented.
But if you just received fraudulent funds, then all of a sudden $50,000-$100,000, that’s just a windfall. And the people have to do something with that money. So we went out, and one of the things we examined was whether they, in fact, were more likely to buy houses. And we did find that people that received fraudulent funds were about twice as likely to buy houses as somebody that that received the PPP, but not fraudulent.
So connecting the dots: It was the ‘regular person,’ I guess, competing against someone who had a PPP loan fraud windfall of a bunch of cash – and that contributed in some ways, you believe, to inflation of home prices?
That’s right. You mentioned at the beginning that various factors drove home prices, and we took all the leading factors from the academic community, and we did find some of those factors explain home prices as well – like home prices went up more in areas that had less available land supply and more people were teleworking.
But even after controlling for all those factors, we found that the fraud was one of the major contributing factors. And so economically, the fraud was as large as any other factor in terms of pushing home prices up.
Why was that? Well, when these people that receive fraudulent funds – imagine that there was five or 10 people that received fraudulent funds and went out and decided to purchase houses in a certain area – then that pushed house prices up, because they’re going out and, you know, new buyers essentially enter the market, decreasing the available supply of houses.
At this point, PPP loans are sort of said and done. The money is out there. Is there anything now that can happen that can kind of contain the housing price inflation that this has caused, or has that train just left the station?
That train’s probably left the station. And probably the sad part is that given that it was a temporary factor, our prediction would be that home prices would probably end up decreasing in those areas where it was driven up by fraud. So that might be an additional reason why home prices – in addition to the high interest rates – are likely to to drift downward in certain parts of the country.
But I think in terms of looking forward, in terms of what this teaches us for policy, I think it also teaches us that fraud can sometimes have unintended consequences in ways that we don’t even initially think. And in this case, the unintentional consequence shows up in the terms of higher good prices.
