"Well, maybe we'll just muddle through."

The words came tumbling on their own out of our mouths in New Orleans last week. And then were followed by our customarily modest disclaimer, "Who knows?"

We have been waiting for the real estate bust to bring the whole U.S. economy down with it. But so far, nothing much has happened. Consumers are still spending. And stocks - as measured by the Dow - hit a new record after nine straight sessions of increases. Housing prices are weak, but there is no sign of panic.

'Tis the 20th of November and all is well, the papers seem to say.

Maybe it is a bit like the way Hurricane Katrina passed over the levees.

"It looked at first like we had dodged the bullet," explained our guide on Friday. "As long as the wind was blowing the water of Lake Pontchartrain away from the levees, there was no problem. But then, after the eye of the storm passed to the North, the winds changed direction and the water began pushing at the dikes. Then, they gave way right by this Lakeview area."

We had heard a lot about the devastation wrought by Katrina; we decided to have a look for ourselves.

"Lakeview is an area of middle-class housing. Normally, it sits on dry land, six feet or so below sea-level. But you can see the architectural evolution here. Back in the old part of town they were building on higher ground...but they still built up off the ground, leaving a nice crawl space under the house to allow air to circulate. And they built houses with high ceilings so the hot air could rise...and shutters to keep out the sun. But by the time they built this area...only a few years ago...they poured concrete slabs right on the ground and built directly on top of them. Now does that make any sense? What had happened was that they had come to trust the technology. I mean they'd come to rely on the pumps that keep the city dry...and the air-conditioning that keeps it cool. So they didn't worry about building on high ground...or building up off the ground...or about shutters and high ceilings.

"And now look...most of these houses are still empty. But a few people have come back. And they're building just like they did before - low houses directly on concrete slabs. Does that make any sense? As I said to one of them, 'What are you doing? You're building the Titanic two."

More on New Orleans, tomorrow...

Meanwhile, in the rest of the country, faith in the technology of modern finance seems to be at an epic high. No one is quite sure how the pumps work, or how the levees were constructed, but everyone is sure they won't fail. So, they run up stock prices with an untroubled mind.

And here comes a storm. Housing sales are ebbing, after a very long period of flowing. Still, what's the worry? The dikes will hold; everyone says so. The LA TIMES reports that lenders are still writing 'exotic' mortgages. And prices, though sinking, are still supposed to be above those of a year ago.

But a housing market falls apart slowly. And according to our anecdotal evidence, it is still early...the winds are still getting stronger...and shifting direction.

"I bought a house in Las Vegas more than a year ago," an old friend reports. "At that time, houses in the area were selling for $330,000 to $380,000 approximately...and there were a few for sale. Now, they're almost all for sale...I priced mine at $270,000. Still, no takers. I want to sell the house, of course, but there are some people who really need to sell. That's why I think this housing collapse is just beginning."

"I saw another statistic," said another old friend. "Half of all the houses for sale in America are empty. In other words, they were speculations. You know that many of those sellers must be very motivated."

Last night, back in Paris, we had dinner with a Canadian woman who sold her house in Bethesda, Maryland - a suburb of Washington, D.C. - a year
ago:

"My agent told me that I hit the very top of the market," she said. "I have friends who just put their house on the market this summer. They can't get anyone to look at it."

Prices have not collapsed. But bids are disappearing. Speculators are laying low. And genuine buyers are waiting...hoping to get a better price later.

And here comes a bad report from an important housing barometer: housing starts have fallen to a six-year low. With too much inventory already, builders are cutting back as fast as they can.

Maybe the storm will pass without major damage. But if we were you, dear reader, we'd get out of town.

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