This goes to show the danger of the housing stock over-build during the property bubble. With so many empty homes, it is far easier for housing prices to fall.

According to USA Today, the Halloween bash at the six-bedroom mansion was a huge success, drawing 1,000 people. It ended only when traffic gridlock got so bad police had to be called.

But the party wasn’t an isolated event. Similar unauthorized parties are taking in place in other cities with vacant homes — evidence of how the problem of empty and foreclosed homes are causing neighborhood blight and other problems. Although some places, like the Phoenix metro area, are showing some signs of progress in dealing with vacancies, there’s been no widespread solution.

As a result, for some neighbors, falling property values from empty homes aren’t the only issue they have to deal with:

In San Diego County, young people have taken over foreclosed houses for late-night rave parties, says Detective Jeff Lauhon of the San Diego County Sheriff’s Office. Lauhon says the culprits were well-organized in some instances: A young couple would get a realtor to give them a tour of a foreclosed house — usually in a rural area on a large property. The woman would distract the realtor while the man surreptitiously left a window open or door ajar. They would then return and invite others for parties that lasted until the wee hours.

At least they’re not pushing dump trucks out of windows.

A party is a temporary way to fill a house, of course. For many cities, the long-term problem of vacant and abandoned foreclosed homes remains a crisis.

As we reported last week, Fannie Mae has a new program to allow owners of foreclosed homes to stay in their properties and rent them back for as long as a year. But filling foreclosed homes with former owners-turned-tenants is also beginning to take hold, on its own, in some of the Sunbelt states that have been hit hardest by the foreclosure crisis, according to Alan Mallach, a visiting scholar with the National Housing Institute and the Brookings Institution.

Mallach told TWI last week that investors increasingly are buying up bank-owned foreclosed homes in the Phoenix area, then renting them back to their former owners. The strategy is to allow the rental for at least five years or so, by which time the investor probably can sell the house again at a profit, while the borrower has a chance to improve his credit. And the best part: Some investors say their plan is to offer the house for sale first to the former owner.

Everybody wins, and if the idea spreads, it may be one way to address the vacancy problem.

Until then, there’s not a lot else out there to clear the backlog of bank-owned homes sitting empty in many neighborhoods.

So in the meantime, unauthorized parties will just have to do.

The movement calls for communities to cordon off mostly vacant areas, cut them off from city services and let the land return to nature. It’s headed by Genesee County Land Bank Chairman Dan Kildee, who has drawn national attention for his efforts. As TWI noted recently, Kildee has been asked by the Obama administration and by a group of charities to explore the shrinking cities approach for other communities beyond Flint.

But urban ideas that play well on the national stage don’t always have the same reception closer to home, the Messenger says.

Businessman Dayne Walling and former state representative and current Genesee County Commissioner Brenda Clack, both Democrats, are facing off against one another in an August election. Both candidates recently expressed some doubts about the movement — and pressed for more details. Walling, for example, noted that there are thousands of houses that need to be torn down, “but we need to make sure that residents have every opportunity to weigh in on the process. Every neighborhood needs a unique solution.”

From the Messenger:

Clack called the shrinkage push a “political bullet,” adding that she is worried about residents who are low income or senior citizens living in properties that the land bank might have its eyes on being left out of a place to live.

“I don’t believe in removing people,” she said. “In some areas there are one or two abandoned homes on a block that need to be torn down, but we don’t even have the money to tear them down.”

Clack said that the shrinkage idea would “not be a top priority” for her if she was elected mayor.

“You re-pattern the city, you don’t shrink it,” she said.

Both candidates said they were concerned over the current lack of specifics regarding the shrinkage push.

“It’s partly controversial because not that much is known about it,” Walling said. “Right now it seems more like a catch phrase, not a plan.”

Former Flint Interim Mayor Michael Brown had jumpstarted the shrinking cities idea by suggesting in March that the city should cut off service to abandoned areas as a way to deal with blight.

Now that the shrinking cities idea is a movement, it could be something that sounds like a great idea — unless it happens to be your neighborhood that’s on the chopping block.

Just to review, here’s the situation: Banks are sitting on hundreds of thousands of  vacant and vandalized properties scarring neighborhoods around the country — houses the banks foreclosed on, but didn’t sell at sheriff’s auctions or foreclosure sales. Those properties are known as REOs, or real estate owned homes.

Usually, banks unload those properties as quickly as they can, taking their losses and to avoid being in the property management business. But these are not normal times. Some 1.5 million REOs are expected to come down the pike this year. And to make things worse, as RealtyTrac vice president Rick Sharga pointed out, banks are sitting on some 700,00 properties that they’ve foreclosed on – but haven’t even yet listed as REOs.

Why would they do this? As TWI explained, some banks are sitting on distressed properties as they wait to see what the government’s next move might be, and what kind of deal they might get for their foreclosed houses. Some are hoping for a “bad bank” to come along and buy up all their toxic mortgage assets. Others don’t want to record losses yet on their foreclosures by listing them as REOs, because, as one economist told me, “they want to keep the paper active,” possibility  to borrow against it for more TARP bailout money.

The reason all this matters is that vacant homes go south quickly – stripped, vandalized, and turned into a neighborhood eyesore or a den for drug dealers. The houses drag down property values for everyone else, and further tax cities and states burdened with cleaning them up. And there are so many that they’ve overwhelmed the resources of local community development groups.

The government has kicked in $4 billion to fix up and sell foreclosed homes, with $2 billion in additional money coming soon from stimulus funds. But it’s barely enough to address the problems in just Chicago alone, so imagine small the impact will be nationwide.

If you’re looking for a scandal, here it is. Some banks hire property managers to care for these houses, but many don’t. So: Banks taking government bailout money sit on distressed and deteriorated homes in already hard-hit neighborhoods — making the foreclosure crisis  even worse. And the government so far has failed to attach any conditions on banks that receiving bailout money that would require them to clean up their neglected REO inventories.

In cities like Cleveland, the REOs have become a bigger problem than new foreclosures themselves. In other cities, decades of hard work to draw investment and development to once-marginal neighborhoods is being undermined by so many bank-owned vacancies.

No doubt $165 million in bonuses to a failed company merit public outrage. But there’s another side entirely to the foreclosure crisis, one that hasn’t sparked the derision it surely deserves, because it’s localized, and mostly unseen in communities that aren’t suffering as much.

But it’s growing, right along with the anger of the people who live in neighborhoods devastated by abandoned REOs. And when it finally gets too severe to ignore, expect the same response of surprise and shock that accompanied the AIG disclosures. That’s how those in power justify failing to act in the face of problems they should have recognized, long before they became a crisis.