[nradov]

In hot markets with thin inventory there are still enough affluent buyers who can afford to pay cash using gains from other investments or family wealth. Prices are set at the margins so it only takes a few such buyers in each neighborhood to keep market prices high. Ultimately people need somewhere to live, and if they have to be in a particular area due to work or family obligations then they'll pay whatever it costs regardless of the underlying value.

[vbtemp]

Solving for the equilibrium though, if the prices fall, more buyers will be available to compete, so it ends up right where it was before.

[lazide]

With interest rates rising, the volume of buyers is dropping. In high demand areas, the folks who got lucky with a windfall or whatever, can still buy.

But the normal buyers will get more and more priced out, and the affluent area will end up with less and less volume as sellers start waiting it out because the volume of available buyers gets thinner and selling gets riskier.