Bubble: There is some effect such as you describe, but it's not nearly as direct as, say, the bond market. Whole lot of reasons for that, including the fact that the bond market is emotionless, all facts and figures, while home sales incorporate a large dose of emotion.
But beyond that, it's true that in the bond market, as interest rates rise, the value of bonds falls. But the analogy doesn't work for housing. First, a bond's yield is directly tied to the interest rate because it's really part of the bond. A $1,000 bond at 8%, for instance. If I hold onto the bond until maturity, I know I'll receive the $1,000 back plus 8% interest. But with a house, its value and its mortgage are separable--it can be refinanced for instance--and the ultimate value of the property (say in 10 years, or 30 years) has virtually nothing to do with the interest rate of the initial mortgage--it has to do with market trends, construction, functional obsolescence, changing demographics, and on and on. Your scenario would work only if the original mortgage were inextricably linked to the property, regardless of who might buy or sell it during the intervening decades. If I bought a house back in 1978 with an 8% mortgage, and today I was required to sell it along with the 8% mortgage, when mortgages are under 6%, then the house would be less valuable than one at a lower interest rate. But I don't have to. I sell the house, and the new owner can pay cash...can finance part of it...can finance all of it...and the rate depends on multiple factors.
Plus, there are other restraints and constraints on housing prices, regardless of interest rates. For example, if interest rates doubled to, say, 11%, you might suggest that housing prices should drop by half. A $100,000 house will then be worth $50,000. Other than past historical patterns, indicating this doesn't happen, we have to recognize that many of the owners of $100,000 houses bought those houses for more than $50,000. Most, practically, would be unable to lower their sales price to $50,000...even if they wanted to. And so they don't. And on the other side, if interest rates were to drop to 2%, would that $100,000 house be worth $300,000? No. There's a limit on what people can afford. A 66% drop in interest rates would not increase earning power by a factor of 3. What that drop would do is make that $100,000 house more affordable to more people.