Some markets that are not nuts will take a 5-10% haircut, 99.5% of new home buyers will be slow to buy at 5%-7% rates, but nesting with custom kitchens and school districts being important with 30-40 year old wives is a strong instinct.
The markets that were up 75% - 250% over the past 5 years will just plain have no buyers until that 2.5 million dollar listing sells for 750k and the seller are ready to take a loss because cash is king as another asset is more attractive.
A 3 million - 1 million dollar home is a specialized listing to very few zip codes and less than 200,000 buyers per year. Just about every one of those buyers already has a loan at 3% for a 1 million - 500k house they wanted/refied just 18 months ago. Nobody needs a 2.5 million dollar house and certainly none are starter home.
The rest of the must buyers will be looking at a lower teir of home unless prices return to 2017-2018 numbers. 350k - 150k there is a ton of housing that provides a roof and school district. The local tax burden is insane even at that strata but it manageable in most zip codes. Even at 7% rates, one has to consider that there are great deals and rates will at least go back to 5% sometime in any 3-5 year business cycle. That would make the discount needing to be 6% - 12% on average for 350k - 150k houses. In my sedate maket those houses are up 20%-40%. Motivated Buyers and sellers can find a equilibrium point quickly at the low end. There will be some McMansion Zip codes that will take half a decade to recover to having sales even at 2018 prices at 5% rates.
I remember housing prices in the 70’s with similar inflation to what we’re having now.
The real price of building a home never went back to what it was before 1976 anymore than the price of a bottle of coke went back to 5 cents a can.. Ford’s ‘whip inflation now’ didn’t work on housing.
You’re factoring in interest rates but not costs of labor and building supplies changing... permanently