1) You're competing in an auction for the house so if you make 75th percentile income and only willing to spend 20% of your income on a house than anybody in the 50th percentile and higher whose willing to spend say 40-50% of their income will out bid you.
2) Interest rates do make a big deal when buying a house. A 250k house @8% is a 1.8k monthly payment (21.8k/yr) while that 250k house @4% is ~1.2k and @2% is ~900. So if you can afford spending 1k/month on a house then @2% that house is 270k, @4% that house is 210k, and @8% that house is ~140k.
2a) So you could buy a 270k house @8% and be paying ~2k/month in hopes of the interest rates to drop to 2% and then refinance to pay ~1k/month but I'm risk-adverse so I don't condone that idea unless you can stomach 2k/month.
I'm guessing without rising interest rates we wouldn't actually see the housing market cool down.