SAN JOSE (CBS SF) — A San Jose city-owned alley is becoming an embarrassment for the high-tech city.

City leaders and residents say “The Alley,” located between Second and Third streets and running from Margaret to Martha streets, has been long forgotten.

“This is the heart of Silicon Valley and we’ve got third world alleyways in the midst of our city,” said Councilmember Sam Liccardo.

The alley is a two-block stretch of dirt, potholes and forgotten history — all of it owned by the City of San Jose.

Malyn Knight owns one of the original Victorians along the alley complete with a stable, that dates back to the mid-1800s, when horse and buggies pulled up to the homes using the dirt path.

“It’s like a country road,” Knight said laughing.

And so it stayed that way for generations. Today, it’s a magnet for graffiti, illegal dumping and flooding. During big storms, the mud and water is knee-deep.

“I call it Lake Third Street!” said homeowner Milan Pakes.

After years of asking the city for help, Pakes got so frustrated he put down layer upon layer of carpet and rugs.

“I never gave up, put it that way,” he said. “I didn’t know if I had any hope or not. All I know is I’ll keep trying and see what happens. That’s all you can do when you’re dealing with bureaucrats.”

Councilmember Liccardo says the city wanted to divide up the alley, sell the chunks to homeowners and close it up.

“This is an embarrassment to the city,” he said.

When that failed, there was no choice but to spend $1.4 million to change it.

“So we’ve been in this fix for several years now,” Liccardo said. “And with no alternative with regard to this alleyway, I decided to push forward and at least get it properly maintained and paved.”

The alley remains a symbol of 150 years of dirt and optimism.

“Maybe this year they’ll do something,” Knight said. “We hope.”

The State of California has offered to pay for the bulk of the improvements and the project has also been placed out to bid.

Homeowners were also offered to buy this section of land for $1, but the law says you have to have the entire block buy in to it for it to work.