Question
QUESTION: I bought a yellow magnolia "butterflies" 2 years ago.  Rather than thriving, it is declining.  The tree is almost leafless (in august!) and had a weak flowering this spring.  The leafless branches are dead and simply crack off.  the entire tree bark (including leafing branches) is covered in a labyrinth of white spots and tiny masses of yellow/green hard, lichen-like growth.  When I rub the white spots, it appears as if powder is rubbing off.  I see no sign of insects, no sap.  it has had plenty of water, is in a well drained location full of good soil.  it is on the west side of a brick house wall.

ANSWER: Sounds like powdery mildew. The fungi which cause diseases known as powdery mildew attack a wide variety of ornamental plants.

A powdery, fluffy white to light gray-colored fungus growth on succulent stems, leaves, buds and flowers is the characteristic symptom of powdery mildew. Young plants and actively growing shoots are more severely damaged than older plants, leaves or branches. Infected leaves may be dwarfed, curled or deformed. Powdery mildew can destroy the blossoms on crape myrtle. Small dead flecks in the leaves and defoliation may occur on some varieties of azalea and rhododendron that are infected with powdery mildew without the obvious development of white fungus growth.

Fortunately, powdery mildew is only a cosmetic problem on many plants. It will make the plant look a little ragged, but it doesn't kill the plant. On some plants, however, powdery mildew can cause severe leaf loss and yield reduction in vegetables. In this case fungicide applications may be necessary to reduce or prevent injury.

Many fungicides containing dinocap, dithiocarbamates, myclobutanil, triadimefon, triforine, sulfur or thiophanate methyl are registered for use against powdery mildew. Regardless of which type you select, be sure to READ THE LABEL and FOLLOW THE INSTRUCTIONS to make sure you use the fungicide in the most effective manner possible. Note that not all products are registered for use on vegetable crops, and sulfur can be damaging to some squash and melon varieties! Begin treatment on valuable plants when symptoms appear to prevent the disease from spreading.

Check with your local nursery/garden type store for a fungicide for powdery moldew.S

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QUESTION: I thought about that, but whole branches of the tree are dead.  Is that possible with powdery mildew?  Could it be a fungus in the soil that is effecting the tree as a whole?

Answer
It is possible for powdrey mildew to kill young trees.
The main root problem for magnolia is vercillium wilt which also have about the same symptoms.
But these symptoms can be caused by other problems like roots being bound by not removing the burlap from around the root ball when planting, planting hole too small and the roots can not grow and a number of other "environmental type" problems.

If it is a root disease there is little that can be done for this plant.
Here is a web site to vercillium wilt that will describe the symptoms and the disease ID.

http://ohioline.osu.edu/hyg-fact/3000/3053.html

I would check with the nursery that sold the plant and ask them if they have any ideas. Also if you live in the US call the local office of the Agriculture Extension Service and ask for their Horticultural specialist and they can advise about local diseases of trees and maybe be able to come out and ID the problem on the ground. Their number should be in your local phone book.
Sorry that is about all I can do without seeing the plant and conditions it is planted in.