The housing market ended up bearing a disproportionate cost from successful scammers who filed fraudulent claims filed under the Paycheck Protection Program (PPP). Homebuyers in 2020 and 2021 had to compete with fraudulent recipients of PPP funds who effectively treated the cash as an artificial stimulus and used it for discretionary spending, leaving every competing U.S. homebuyer on the hook.

According to a study by researchers at the University of Texas at Austin, published this week in the Journal of Financial Economics, about $800 billion in small business relief loans, known colloquially as the PPP loans, was doled out during the pandemic’s early days, and some of those funds were used in fraudulent ways.

“In a horse race, pandemic fraud is one of the largest and most robust factors explaining house price appreciation during COVID,” the study’s authors wrote.

Areas where PPP fraud was rampant in the first years of the pandemic could expect home prices 5.8% higher on average relative to comparable markets with less grifting. 

Several factors have pushed up housing prices in recent years. One was that many Americans simply had more money to spend, their bank accounts healthily insulated by curtailed travel and entertainment expenses. In the early days of the pandemic, housing demand was further boosted by stimulus checks, loan relief programs, and extended unemployment payments that helped pad household incomes—including those wielded from PPP loans.

Con artist homebuyers

The study sampled 18,761 ZIP codes across the country, covering over 90% of the U.S. population, and matched individual areas with places known to have a higher concentration of fraudulent PPP activity. Previous work by the same authors found suspicious PPP loans were geographically concentrated. For instance, in Cook County in Illinois, home to Chicago, the share of loans considered suspicious was 31.7%, as compared to only 8.8% in Manhattan, and 6.1% in Los Angeles County.

The authors then matched high-fraud ZIP codes to areas with fast-appreciating home prices. After testing against other economic variables that may have contributed to higher costs, and comparing housing activity in high-fraud ZIP codes to low-fraud ones in the same county, the researchers found illegitimate PPP loans to be one of the core drivers of housing prices.

PPP loans were first implemented in March 2020 to support small businesses during early-pandemic disruptions. The funds, paid out through private lenders including banks and credit unions, were intended to help employers maintain payrolls, hire back employees who may have been laid off, and cover overhead costs. 

The program, which ran in 2020 and 2021, ultimately approved around 11.5 million loans worth a total of $793 billion. Nearly one million individual organizations were granted loans between $150,000 and $10 million.

But the program’s short timeline, and urgency to disburse funds in early weeks, also made it particularly susceptible to fraud. A 2021 paper by the same researchers at the University of Texas estimated that nearly 2 million PPP loan recipients—collectively awarded around $76 billion—had been fraudulent. And in a 2023 report, the Small Business Administration’s Office of Inspector General reported that of the total $1.2 trillion it had issued in pandemic relief loans, around $200 billion was likely fraudulent.

The neighbor who broke the housing market

More recent research suggests fraudulent loan recipients used their funds to support personal lifestyle spending. The latest paper found that PPP recipients that had been flagged as potentially fraudulent were 17% more likely to purchase a home in 2020 and 2021 than a non-flagged recipient.

Housing wasn’t the only item scammers were happy to spend on. The researchers also tracked rising demand for cars and other luxury items in ZIP codes with higher PPP fraud rates, reporting a 2.8% increase in auto title registrations in high-fraud zones, as well as higher spending at grocery stores and restaurants. 

Spending activity in these areas surged in 2020 and 2021, while PPP was active, before quickly normalizing by 2022, months after the program had stopped taking applications. 

Despite its relatively short lifespan, PPP ended up as one of the easiest government programs to take advantage of. Ostensibly designed for troubled small businesses, the program issued nearly $1 million to Tom Brady’s nutrition company, between $2 million and $5 million to a clothing line owned by Kanye West, and loans collectively worth hundreds of millions of dollars to large, publicly traded companies. 

Because the program had been set up for struggling firms, recipients also had a low bar to meet for their loans to be forgiven. By the time PPP had wrapped, some 92% of loans had been granted full or partial forgiveness, according to an NPR investigation.

The story of America’s lopsided home prices has often been pinned on the wealthy remote workers who squeezed home supply in the pandemic’s early days. But in many parts of the country, the catalyst for a broken housing market may have been much closer to home.