When interest prices increase, affordability (list price) decreases. So a $2000 a month mortgage payment only buys a $400k house, not a $550k house.
In other words, all the flippers are out on their nuts, because they are buying $400k houses to sell for $600k, because the average dope can afford a monthly payment on $600k at 3.5%, but not at 5%.
I often bitch, but in the end I guess I would rather pay a bank more money to borrow (a credit union mind you), than a flipper who inflates the sale price of a house. Also the taxes will be lower (even if by a little), and I assume insurance is lower on a less expensive house.
Also it is better to have lower principal than lower interest rate. You can always refinance in the future to a lower interest rate or pay more money to effectively pay lower interest rate. Principal, on the other hand, you are basically stuck with.