US home foreclosures moved up 49% in May, compared with the same month a year ago.

Figures from RealtyTrac show that "One in every 483 U.S. households received a foreclosure filing in May," according to the AP.

Lyndon Johnson’s "Domino Theory" may not have worked in Southeast Asia in the 1960s, but it is at work in the US economy now.

The recovery of consumer spending is based to a large extent on some stability in housing prices. A person who feels poorer every month is rarely a big spender. Foreclosures, by their nature, push the prices of the homes around them down.

A turnaround in the financial sector also relies on a better mortgage and housing environment. Banks stuck with bad loans rarely do well. The share prices of Wachovia (WB) and Wells Fargo (WFC) attest to that.  At large investment banks, mortgage-backed paper can continue to lose value if the home lending market continues to fail. The harm spreads to Fannie Mae (FNM) and Freddiie Mac (FRE) quickly. With such pervasive trouble, the disease in the system remains unchecked and untreated.

Foreclosures may be the single best indicator of where the economy is heading.

If so, it is going to hell.

Douglas A. McIntyre

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