I'm afraid to use regular or target ammunition because there are houses nearby
So far everbody has assumed you are concerned about the noise. It that it or are you worried about hitting the closer houses?
If it's the noise, is it because there are regulations about discharging a firearm within "x" number of feet from a dwelling or within city limits? If so, maybe you should be looking to other methods of pest control.
If it's hitting houses, shooting up into a tree may not be the wisest thing to do regardless of the ammo.
BTW: I didn't know ground squirrels climbed trees.