How Payroll Protection Program (PPP) Funding Saved Real Estate Investors

Real estate gained a lot of attention in 2020 simply because home prices rose strongly across the country. In contrast to widespread lay-offs and large numbers of business closures related to the COVID-19 pandemic, existing home prices increased 14.9% during 2020 according to the National Association of Realtors.

“The soaring home prices seen in 2020 can be attributed to a severe inventory shortage, historically-low mortgage rates, and strong demand,” said Rick Sharga, Executive Vice President with RealtyTrac – a leading source of real estate and foreclosure data for investors. “In addition, the COVID-19 pandemic was plainly behind the new emphasis on bigger residences, less commuting, and more home offices.”

But maybe there’s another reason why real estate performed so strongly. Could it be that government programs designed to keep the economy afloat also pushed up real estate demand?

The Great Financial Oddity

Our real gross domestic product (GDP) – the total of the goods and services we produce corrected for inflation – amounted to $20.93 trillion in 2020, down $500.6 billion from 2019.

At the same time, according to DQYDJ.com , the median household income increased to $68,400 in 2020 — a big jump from $63,030 in 2019.

You can see the conflict. GDP went down, yet household income went up. How was this possible?

The New Notion of Debt

In 2020 the Federal Reserve and the US government changed the rules. Instead of worrying about the massive federal debt, they bet that an even-bigger debt was the only way out of the potent economic disaster set off by the pandemic.

According to the Peter G. Peterson Foundation , the government spent nearly $3.5 trillion fighting COVID-19 and the economic havoc it created.

Legislation enacted to combat coronavirus pandemic

How we spent this money is tricky. For instance, the government established the Payroll Protection Program (PPP) and handed out checks to millions of small businesses across the country. This looks like a benefit for small business owners, and it is. However, the program was also a way to save government dollars and bulk-up local spending.

Most PPP money – 75% at one point – had to be spent on payroll. The remainder could be spent on such expenses as rent and mortgage interest. Unemployment levels were reduced as a result of program requirements, saving the government huge sums it didn’t have to pay for millions of additional jobless claims.

Round 2

In late December Congress passed a new PPP funding measure as part of the Consolidated  Appropriations Act of 2021. PPP was financed with $284.5 billion in additional money and program rules were changed.

First, whether PPP money was taxable or not was finally settled. PPP money, said the new legislation, was not taxable if used correctly. Businesses had to spend the money exclusively for payrolls and other approved costs. In practice this meant recipients would be smart to put PPP money in an escrow fund so it could be easily tracked.

Second, PPP loans of $150,000 or less would be automatically forgiven in most cases. Why? Because banks – which distributed the money – did not want the costs of auditing millions of small businesses given the limited fees paid to administer the program. Small businesses, however, could be audited and thus were effectively required to have documentation just in case a bank or the SBA asked how the money was spent.

Third, those who were able to get PPP funding in the original legislation could get additional money in the second round. The process was simplified for those seeking less than $150,000.

Real Estate Impact

Without the PPP money millions of workers would have lost their jobs and been unable to pay for such costs as rent, auto loans, cell phone bills – defaults on a mass scale that would have spread financial havoc throughout the economy.

How much displacement has been avoided?

In mid-2020 the SBA reported that PPP “supports 51.1 million jobs, as much as 84% of all small business employees.” And what if PPP was not in place? A December Treasury study estimated that PPP saved 18.6 million jobs.

In a pandemic economy where landlords can generally not evict and lenders can generally not foreclose it’s PPP money that has kept millions of housing units filled with paying occupants. It may seem like a round-about way to prop-up the housing sector, but in tough times whatever works should be welcomed.


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