Here's what you want to do:
1 - go to manage domains in the panel and create a sub-domain (fully hosted) such has dev.example.com, be certain to set the USER to the same user for your existing site.
2 - OPTIONAL: if want to restrict access, go to goodies > htaccess/WEBdav in the panel, fill out the form there which is mostly self-explanatory-- don't check the WEBdav box tho, that is something else. Also you probably only need one user, this isn't for added security its just to keep nosy people and search bots (such as google) away from your site while it's under development.
3 - wait until you see the default dreamhost coming soon page when you visit dev.example.com. This ensures DNS is propagated at least enough for you to continue.
4 - in the panel go to goodies one-click installs and install worpress on dev.example.com (hint: you can leave the box that follows the / blank)
get your site up and running on dev.example.com while your regular site at example.com continues on.
When you ready to make the new site your regular live site there are 3 things you must deal with:
(if you did the OPTIONAL step 2 above, go undo it first--i.e. uncheck the htaccess box and resubmit the form. (and wait for that to happen/take effect before proceeding)
A - (This must be the first step, or you won't be able to log into the WP dashboard after step B.) In the WordPress dashboard change the 2 boxes relating to the site URL.
B - using FTP/SFTP or the shell, rename directories. example.com to TEMP, dev.example.com to example.com, TEMP to dev.example.com. (if your catching on, the process to this point is easily reversible.)
C - either using phpMyAdmin or a WordPress plugin update all the links in the database. Worpress stores full absoloute links to point back to itself, those will all be dev.example.com and need to be updated to example.com (the name of the plugin I can't think of right now, if you can't find it, I'm sure someone can help).