To say the market has been sluggish would be an understatement. The main problem is sheer volume – a staggering 150,000 vacant housing lots across metro Atlanta are available, more than a decade’s supply at current absorption rates.

The median sale price for empty lots has plunged from $57,000 at the height of the housing boom in 2007 to $30,000 this year, according to Smart Numbers, a Marietta company that tracks the local real estate market.

“It’s going to keep going down, because we have too many lots, and there’s not enough demand,” said Steve Palm, the firm’s president.

To add to the woes, smaller banks are complaining that bigger banks that received bailout funds have an unfair advantage when it comes to getting zombie subdivisions off their books.

Large banks that have received federal bailout funds are better able to sell property at sizable losses, which pushes down prices for everyone, said Joe Moss, at Security Exchange Bank in Marietta.

“We don’t have the ability to take asset write-offs against taxpayer money like these larger banks have,” Moss said. “That’s really affected the market.”

This isn’t just a Georgia problem. As TWI has reported, the foreclosure pipeline remains clogged with a huge backlog of bank-owned foreclosures, or Real Estate Owned properties, that have yet to hit the market. The zombie subdivisions are part of this, and they are evidence that the housing market has yet to hit bottom. As Reuters noted recently, bank-owned foreclosures have created a shadow inventory that will hold back any recovery for months or years to come.

“Shadow inventory has the potential to give us another leg down on home prices during the second half of the year,” said Steven Wood, chief economist at Insight Economics in Danville, California.

“It appears that there is a significant amount of shadow inventory in the form of bank owned properties, which will continue to grow with the rising in delinquencies,” he said. It can take about 4-6 months for a house for be out of foreclosure and ready for sale.

Abandoned subdivisions and neighborhood blight caused by vacant bank-owned properties are part of the human cost of a looming shadow inventory, but the problem hasn’t gotten much attention. As zombie subdivisions pile up in Georgia and elsewhere, increasing the visibility of the situation, that could change. You can’t really miss them when you drive by — the half-built homes, the weedy areas where the community pool was supposed to be. In some cities, it’s even worse, with trashed and vandalized bank-owned homes dragging down the surrounding neighborhood. Somehow, however, Washington continues to fail to see it.

As we noted, the time is ripe to try new tactics to combat foreclosures, including encouraging ways to rent foreclosed homes back to former owners. Fixing tax laws that are slowing down some loan modifications might help. Even direct loans to homeowners could be a strategy.

Surowiecki agreed:

If we really want to keep people in their homes, then, nudges and renegotiations probably aren’t going to do it. We need more direct action. One option, which the banking lobby killed earlier this year, would be to allow “cramdowns”: let bankruptcy judges reduce the principal on homeowners’ mortgages. Another, even more direct option is simply to give aid to homeowners: one proposal would have the government make low-interest loans, or even grants, to people who have suffered a steep decline in income and have negative equity in their homes. That would target the aid at the people who need it most: as another Boston Fed paper shows, defaults are most likely to happen not just because interest payments are set too high but because of income shocks (usually after the loss of a job) and plummeting house prices.

Surowiecki pointed out, as we did, that forceful actions to help homeowners might not be popular; no one wants to pay off their neighbor’s mortgage. But as foreclosures continue, the spillover effects on surrounding neighborhoods will become more severe, which may change that attitude.

But in the end, Sur0wiecki says, the Obama administration will have to come to a conclusion it hasn’t reached yet: Fixing the roots of the crisis is going to be costly. The government seems to be in denial on this. The current view is that “we’ll just keep muddling through with the current approach, which offers us the sense that we can get quite a lot without spending much,” Surowiecki said.

Maybe it’ll work. But the housing bubble was very expensive. It’ll be surprising if we can deal with its consequences on the cheap.

More reasons why it’s time for the government and the lending industry to quit trying to just muddle through the crisis and really rethink foreclosure strategies.

From The San Francisco Chronicle:

John Russo, Oakland city attorney, said the city is gearing up to use California’s new foreclosure-blight law to force lenders to maintain their properties.

The $1,000-a-day fine “is a powerful tool for some tough and fair negotiations with banks,” he said. “The most important thing is to have banks understand that it’s not OK to treat foreclosed properties just like numbers on their ledgers; these are actual homes in the fabric of our neighborhoods. If banks have several properties on a block that they’re holding, waiting for the market to turn, maybe they need to hire security guards. That is their responsibility; it is their property.”

In Boston, city officials aggressively are going after banks, The Boston Herald reports:

City inspectors have slapped thousands of dollars in liens on 43 vacant or foreclosed properties blighting Hub neighborhoods to halt the national housing crisis from spreading more urban decay.

Among those being targeted are big banks, including Deutsche Bank and Wells Fargo, who have ignored their responsibility to maintain the seized homes. The liens, totaling more than $67,000, reflect the cost to the Inspectional Services Department for boarding and securing the vacant properties, according to the agency.

“Pay up or we’re going to take your property,” said Mayor Thomas M. Menino, who is fed up with big banks that continue to let their foreclosed properties languish and drive down Hub property values.

As Mike points out today, Sen. Richard Durbin (D-Ill.) complained last week that banks have so much sway on Capitol Hill that they “frankly own the place.” That same attitude seems to hold true in neighborhoods scarred by bank-owned foreclosures. But with new anti-blight laws, it looks like those neighborhoods are beginning to fight back.

Jim the Realtor seems to have hit the big time because he’s not your typical real estate agent. Armed with his pocket video camera, he tells it exactly like he sees it, a running commentary of slightly jaded, off-kilter observations as he walks through another foreclosed and once wildly-overpriced home. My favorite is his  running pool trick video, where he toured a spacious, clean, lovely foreclosed house, with a pool and hot tub out back, the soothing sound of gurgling water everywhere. That is, until Jim the Realtor turned off the water to the pool and hot tub – and showed how the running water masked the loud and constant roar of the freeway nearby.

Here are some bloopers and outtakes of Jim the Realtor’s work, currently making the rounds. Enjoy.

“About a third of all of the foreclosed properties nationwide have been so damaged, either by the previous owners or by criminal gangs coming in after the foreclosure, that they no longer qualify for standard mortgage financing,” Popik told CNN. “So there is going to be all kinds of government programs to help, but if they don’t qualify for standard mortgage financing, there’s no one to buy these properties.”

Popik says responses from thousands of real estate agents nationwide to the questionnaires he sends out quarterly indicate that badly damaged foreclosed homes — so-called “distressed” properties in real estate jargon — are a much bigger element of the national housing picture than officials in Washington have acknowledged.

Exactly what we’ve been saying. Even worse is that some of the banks with neglected Real Estate Owned properties, or REOS, have received billions of dollars in TARP money.

Either the houses won’t sell at all, in which case some banks will likely abandon them entirely, or they’ll be dumped on the market at pennies on the dollar, sold to speculators and flippers who probably don’t care much about the neighborhoods where the homes are located. The scandal isn’t just that the banks allow their foreclosed homes to deteriorate. It’s also what happens to the people who have to live next door.

Cashing in on the REO boom is sort of like finding an economic opportunity in the American Dream gone wrong. The Times describes real estate agents and property managers at a busy and lavish conference in Palm Desert, Calif., dedicated to the REO market, comparing notes on the best way to evict tenants from bank-owned foreclosed homes.

Welcome to the spring 2009 Reomac conference, which has attracted nearly 3,000 real estate agents and property managers to this lush desert resort. The crowd brimmed with a gusto that is hard to find in this recessionary era. The hotel bar did more business on Saturday night than it did on New Year’s Eve. Small wonder: These are the people cashing in on the boom in foreclosed properties.

R.E.O. is industry lingo for “Real Estate Owned,” the term that bankers assign to homes they have taken in a foreclosure. Reomac is the industry group that serves the mortgage default trade, specializing in selling the busted-up American dream.

“Things are going tremendously,” said Darren Johnson, an R.E.O. agent from the Detroit area, who has handled about 180 bank property sales in the last year. “It has never been this good.”

Here’s an anecdote demonstrating how nice it was at the conference, according to The Times:

The convention at the Desert Springs J. W. Marriott formally began on Sunday, with a golf tournament, featuring a “19th hole” bash cosponsored by Coldwell Banker, the giant real estate firm. Other convention-goers were at the resort spa, getting top-priced treatments, like the protein-rich caviar scrub for $185.

Before a property becomes an REO, however, there’s usually an owner who lost a house he or she had pinned their hopes on, had their credit ruined, and no doubt went through months of excruciating financial stress. One agent did tell The Times he hoped efforts to help people stay in their homes were successful, because he didn’t want to make money off of other people’s misery. But others at the convention seemed to have few such qualms. Again, from The Times:

Sherry Waite, who serves an affluent community in southern California near San Diego, is eagerly awaiting the foreclosure of some of her neighborhood’s high-priced homes.

“Three dozen R.E.O. listings between $1.8 and $8 million,” she said, a pomegranate martini in her hand, as she cited what she soon hopes to be handling. “Hello! Those are big numbers.”

Benny Nassiri, who with a partner handles R.E.O. sales in California, Kansas and Louisiana, was sitting poolside Sunday on a chaise longue in a red-white-and-blue bikini, Dior sunglasses and Bebe sandals, sipping a beer and asking her assistant about the party planned that night.

Then a call came in on her cellphone, related to a property she had put on the market just two days ago in Carson, Calif.

“Asking price $360,” Ms. Nassiri told the prospective bidder. “Yes, we already have a couple of offers. Are you ready to make one?”

The call complete, she had her aide send an e-mail message to the possible buyer, as she promised him she could help arrange financing. Sales certainly are hot, she said. “There just is not enough inventory,” she said, before looking once again poolside.

Maybe there’s not enough inventory, because even some high-end homeowners are managing to hang on to their properties. But REO agents aren’t exactly cheering for foreclosure moratoriums and homeowner rescue plans. For them, that would be nothing to celebrate, as they try strive to turn a profit from someone else’s dream gone bad.