Today we found out that housing starts fell 4.5% in October and even more concerning, single-family home building permits plummeted 14.5%, meaning that we'll see an even more significant drop in housing starts in coming months.

Patrick Newport, U.S. Economist with IHS Global Insight, seemed downright worried when I spoke with him today. He called the housing start report, a "shocker."

"These are people who know their business," Newport said of the builders. "They’re in better touch with the market than we are and the press is."

The financial crisis, which really got going after Lehman Brothers collapsed on Sept. 15, will likely cause serious damage to the already faltering housing market. It seems that mortgage applications are way down since September, an indication of falling buyer demand.

U.S. home mortgage applications dropped last week by a seasonally adjusted 6.2% compared to the previous week, according to the Mortgage Bankers Association. And the application volume was down 41.3% compared to the same week in 2007.

I visited the Building Industry Association of Southern California’s annual trade show in Long Beach, Calif. yesterday. This is the big show for Southern California homebuilders, where suppliers of everything from appliances to Astroturf pitch their wares.

Folks tried to inject a little fun into the event. The Hooters girls were meeting and greeting at one booth. A company called Universal Truss was handing out Nerf dart guns (Hari Kari anyone?) But the most popular booth was one from Suncoast Framing which had a working bar set up. The theme for the show was “Setting the Stage” for a recovery. Drowning your sorrows was more like it.

In one of the conference rooms, Lisa Grobar, a professor of economics at Cal State Long Beach, predicted the recovery would come next year. Foreclosures will peak in the first half of the year, she said, but not before a second wave of people loses their homes, due to unemployment, not toxic mortgages.

Steve Johnson, of the research firm Metrostudy, made a convincing case that the California market must be bumping pretty close to a bottom. The number of new houses starting construction, for example, is just 13,000. That’s about 20% of what they were two years ago. The state hasn’t seen this little new construction since the 1950s. “We have virtually turned the engine off,” Johnson said.

That wasn’t news to the panelists at an afternoon session on “Surviving a Down Market.” Of the four panel members, three had either changed or lost their jobs just since the show program was printed. The only one who was still at the same company was executive recruiter Kipp Gillian who said he’s gone from getting a 100 resumes a month to 100 a day. Brandon Clements, who recently got laid off from builder Toll Brothers, says he’s been using the free time taking classes to get licensed as a real estate broker and a construction contractor.

Mike Hunter, a land acquisition specialist, said this was now his fifth down cycle in Southern California real estate since he got in the business in the late 1960s. During one he said he didn’t collect a commission check for four years. He had these words of encouragement for those in the audience. “Every single downdraft I’ve been in, we’ve come back better than the previous one.”

As you can see, 29% of all sales in September and October were REO--real estate owned. That means the previous owners lost the houses in foreclosure and the current owners--usually banks--were unloading them. Another 12% were short sales. That means the current owners were selling them for less than the money owed on the mortgage(s).

In other words, about 4 in 10 sales were by people who were highly motivated to get rid of the properties even if they couldn't get very high prices. That helps explain why ordinary sellers are having such a hard time finding buyers. The chart calls them "non-distressed," but a lot of them are feeling quite distressed anyway, thank you.

The survey also found that total sales fell 19% from September to October as economic and financial conditions worsened. It's bad out there.