Your scenario proposes that the market stays in a perpetual state of disequilibrium, which cannot happen…that’s the reason people don’t understand your question.
My answer: builders would go belly up because they wouldn’t have cash to service their debt…BK ensues and large scale auctions of new homes, partially built homes, and graded land begin in earnest.
Banks start to experience financial difficulty because investors get grumpy about all the assets sitting on their balance sheet consuming cash and screaming opportunity cost.
Sellers get desperate because their houses are sitting vacant for months, or they can’t meet their newly minted ARM adjusted payments.
J6P starts to save so he can afford a home someday.
Or, lenders get creative and start offering creative products that have lower payments in exchange for a share of appreciation on sale.
That’s the pure answer to your question…reality is that each of those scenarios will further pressure prices, so it won’t persist for long.
