I think saying that no one paying would be paying these prices is somewhat unfair. Simply no way of knowing.
Do you think these people like doctors, lawyers, tech workers who are pulling in 300-400k a year all of a sudden no longer want to own a home in the desirable areas when interest rates go up? They still need a place to live and still make a lot of money.
To them, they may not want too rent and will stay pay more. If they plan to be there for 3-5 years minimum it still makes more sense for them to buy.
Renting is extremely high cost and many of these make enough money to just buy instead.
3 years of rent on an nice home in Coronado will run you at least 5k a month so ~60k per year. Thats 180k gone you will never see again.
Just makes sense to buy even if interest rates are high to alot of people in these areas.
Use the above example for the home I just bought. If interest rates are what they are today- Id have not been able to afford it. But does that mean I would stop buying a home? No. It would just push my budget down lower increasing competition at a lower price point. But I still only want to live in a certain area. So that still keeps competition but increases it for people at the top and lower end of their budgets.
And here's where you go off the rails.
There are only two choices in the present state of the economy.
#1. Raise interest rates sky high and get inflation under control - which will not only dump the economy but severely limit the ability of the class of individual you are referring to to make money (this type of person and/or their associates make money by using the bank's money and they won't be able to afford those interest rates). The economy will be in the shitter, to put it mildly.
#2. Stop the rate hikes, go back to QE, and let inflation run away. Worse than scenario #1.
What do you think the Fed will do when the market tanks and we're officially in a recession?
This is not going to be a joke - it's going to be a bloodbath - and the Fed will not have stimmy checks to mail out because those are inflationary, and you can't stimulus while getting inflation under control.
You seem to think this is not going to greatly affect the ability of your buyers to buy their dream home at the beach.
(Of course there's #3 too - the Fed engineers a "soft landing" - after being wrong about EVERYTHING major in the economy over the past two years.)