Zombie Subdivisions and Shadow Inventories Hold Back Housing Recovery

August 11, 2009 | Last updated: July 31, 2020

Via Michael Shedlock, The Atlanta Journal-Constitution reviews the growing problem of zombie subdivisions, those half-built developments you often see from a highway. Developers broke ground for these subdivisions near the end of the housing boom, and abandoned them when the mortgage crisis hit and financing dried up. Now the subdivisions are a drag on surrounding property values, often just partially completed, with a scattering of houses and empty lots where new ones were supposed to go. They’ve also played  a part in bank failures, especially in overbuilt areas like Atlanta. In the past year, 16 Georgia banks have failed, the most in the nation, and the losses are tied to residential real estate losses, The Journal-Constitution reports.

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.