Pandemic Relief Fraud Helped to Inflate House Prices

For years now, many people have assumed that demand for houses, accompanied by prices, skyrocketed during the pandemic. The theory was that people seeking more space for working from home and remote schooling got out of smaller places, often apartments, and into single-family houses.

In other words, the pandemic made them do it.

Research by Fannie Mae released in January 2023 suggested something different, that what drove the move was money. Federal pandemic aid and big injections of liquidity by the Fed, particularly in the form of a zero-interest rate policy, fueled the moves by both first-time and upgrade buyers. Toward the end of 2021, 30-year fixed rate mortgages averaged around 3% and personal savings were heavily bolstered while credit card debt came down, which would have improved credit ratings. Median days on the market dropped from 74 in 2017 to 46 in 2021.

Now researchers from the University of Texas at Austin’s Department of Finance found an additional detail. Part of the money that made a difference was pandemic relief fraud.

That there was significant fraud in distribution of pandemic relief is not in dispute. A new report from the U.S. Small Business Administration estimates that the SBA out of $1.2 trillion in aid through the COVID-19 Economic Injury Disaster Loan (EIDL) and Paycheck Protection Program (PPP) mechanisms, as estimated $200 billion — 17% of the total — were potentially fraudulent.

The university researchers looked at “pandemic fraud facilitated by FinTech lenders” because it exhibited “significant geographic concentration.” That offered an opportunity to study whether “the costs of financial fraud largely confined to funds that are stolen” or if fraud can exhibit “other, perhaps unanticipated, distortive effects.”

“At the individual level, fraudulent PPP loan recipients significantly increase their home purchase rate after receiving the loan compared to non-fraudulent PPP recipients,” the researchers wrote. “At the zip code level, house prices in high fraud zip codes increase 5.7 percentage points more than in low fraud zip codes within the same county, with similar effects even after controlling for land supply, prior house price growth, teleworkability, population density, net migration, distance to central business district, and previous rates of remote work.”

They continued to say that the effect was “entirely driven” by fraudulent loans from FinTech lenders. Legitimate lending didn’t have the same effect.

A 5.7 percentage point increase in prices is far from the total housing price increases the market saw. Those numbers rose from about $383,000 in the first quarter of 2020 to $552,600 in the last quarter of 2022, according to data from the Census Bureau and Department of Housing and Urban Development, a 52% increase. But, for the specific geographies with high fraud, it was that much more.