"When popular opinion is nearly unanimous, contrary thinking tends to be most profitable. The reason is that once the crowd takes a position, it creates a short-term, self-fulfilling prophecy. But when a change occurs, everyone seems to change his mind at once."

 - The Crowd - Gustave Le Bon

Today, the crowd is convinced that U.S. housing is going to make a soft landing.

After all, it's still America isn't it? And everything in America has been soft or getting soft for almost as long as we can remember. Manners have become relaxed and virtues pliable. Waistbands expand. Chairs are plush. The dollar itself is turning to mush and the economy is endlessly forgiving.

In America, a person may still run up a fortune in debt. Indeed, in the last four years, Americans have run up debt enough to eat up the whole GDP pie, yet they no longer fall on hard times. Instead, they bounce off downy ones, right into the cushioning arms of cheap credit. At least, that's been the story this last quarter of a century.

But in the past two years, that simple plot has added a little twist. The Fed has now raised rates to "normalcy." And having seen things slouch so absurdly for so long, we find we no longer know what shape they were supposed to be in the first place. After all, it's now "normal" to spend more than you make...and to mortgage and re-mortgage your house, with no intention of ever paying it off. It's "normal" now to pay daily bills with credit cards. And it's "normal" for the richest country on the planet to borrow money from the poorest, just to make ends meet. So, why shouldn't it be "normal" also for house prices to shoot up like the Google IPO? With inflation, why would they do anything else?

But America is a big country and builders can throw up houses faster than people can put down the money to pay for them. Inflation might be up, but wages aren't. And when wages can't keep up, sooner or later, the builders have to slow down, housing inventories have to be whittled down, and housing prices have to fall in step with falling supplies to match the real demand.

Now, in a healthy economy, the whole thing could go plumb down the chute and pose no problem at all. But for an economy with an abnormal dependency on housing - for jobs, money and consumer spending - the slightest recovery to normalcy might be abnormally painful.

Normal, economist Robert Schiller tells us, is housing prices that are about 40% below where they are now. But since everyone thought housing prices would rise forever, we got one of Le Bon's self-fulfilling prophecies. People bought houses not to live in, but to make money; the abnormal became so normal it began popping up everywhere.

But, as Le Bon puts it, "everyone seems to change his mind at once."

The normal will soon be back in style...even in America. And when it does, the gentle, soft landing Americans believe is their due, may go out the window. Instead, housing will come down like the Hindenburg...and the economy with it.

*** Mortgage rates have gone down for the last five weeks in a row. The yield on a 30-year T-bond is only 4.93% - an amount less than the latest figure for consumer price inflation.

What gives? Bonds seem to be in a bull market (as yields fall, prices rise). In June 2003, we saw what ought to have been the end of the long, 25-year rise in bond prices.

But what's this now? Is there more to this bull market?

Maybe. Falling bond yields could be signaling an economic slowdown...and lower rates ahead.

Does that mean you should buy bonds? We don't know. Do you feel lucky?

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.