To restate the issue, “Is a $400k house at 8% interest effectively worth more than an $790k house at 4% interest?”
Except for some tax or calculation differences the monthly payment is the same. Taxes are higher on the $790k house, tax deductions also higher. To the buyer, the cost of ownership might be very comparable. And that is a problem. The cost increases driven by low interest to some extent kept the payments even. Now that the rates are being raised, yes price will decrease, but monthly payment stay the same.
To the buyer who needed teaser rates to qualify the market is now unavailable.
To the buyer with a big down payment from the early 2006 sale of his/her over priced home, the market is going to look very good.
To everyone else, the market looks the same (interest) times (price) = payment =/- 4%