1) You lock your mortgage rate for 90 days, so 90 days ago rates were significantly lower. These will be rolling off soon and by early next year the prevailing rates will obviously be much higher.
2) People are paying points up front to buy down the interest rate.
3) Jumbo mortgages are still much cheaper than conforming (I think a full point).
4) Lots of people buying with all-cash or mostly-cash. You're not at all rate-sensitive if you're a cash buyer.
5) A lot of these cash-heavy buyers are powered by generational wealth.
6) The housing shortage in the US is incredibly acute, so much so that the market will continue chugging along even as borrowing conditions worsen considerably. I bought a couple of years ago when the market was red-hot largely because a family-sized property was unrentable - to get anything big enough for my needs there was no choice but to buy. I imagine others are in the same position now.
Institutional (or rich) buyers have the option of buying the house in cash, then taking out a loan against the house. This gives them the benefit of being able to make an all cash offer, and the long term benefit of leveraged, low interest debt.
Yes, it's perfectly sensible to use the bank's money when it's a fairly sure bet and the interest rate is low... but there is a big complexity cliff that exists between "used 0.1% of the bank's money" and "used 0% of the bank's money". Using 0% of the bank's money is preferable when closing the deal at least.
If you are in a position to make an all-cash offer but you want financing, you could probably buy the property in cash and then get a mortgage after. That's not the usual workflow for homebuyers but I don't see why you couldn't do it, it's just like refinancing really.
I don't know about you but in my generational cohort the people buying entirely on their own earning power is a small minority. The bulk of buyers are only able to enter the market due to generational wealth - and that comes in the form of cash.
So yeah, agreed in principle that if you had $X in cash lying around it'd be a poor choice to put it all on a piece of real estate. But in this case the $X in cash doesn't belong to you.
The whole state of the housing market is beyond alarming - not only are things completely unaffordable to wage earners, the people who are able to survive in this market are overwhelmingly doing so via familial and generational wealth. This is a flywheel of wealth inequality that is accelerating by the day - the well-asseted use their wealth to catapult their offspring into more assets that largely wage-earning classes (even very well-paid wage earners) are completely cut out of.
I've also known people who have enough familial wealth that they just don't care.