If the housing costs too much it is because there are people out there who are willing AND able to pay for it. Perhaps I am over simplifying, but other than the interest rate which is mostly set by the fed I don't see what the banks have to do with the high prices. There is obviously someone out there with the money who is able and willing to pay way too much for a house which is the reason the price is too high in the first place.
It's not necessarily the banks alone. I know I react a bit to the current standard of 20% downpayment being required, but it's not that by itself - it's the whole situation.
So ideally in a market driven economy here is what should happen. The people who are only making $50k a year should get the hell out of Seattle and move somewhere in the rust belt where they can pick up a cheap $75k house they can afford, and then have a good life. And then there should only be high earning people living in Seattle where the homes cost too much and only the elite and the foreign buyers can live there. Fuck Seattle because that land should only be for the already rich people and the foreign Chinese buyers. And then when all the lower earning people start moving out, and stop actually trying to buy homes they can't afford.... that is when the housing prices in Seattle might have a chance to fall again like they should. Or am I missing something here?
Generally, I think you're not too far off... except for a couple of things embedded in your assumptions. There simply aren't jobs in the rust belt... so the people who make $50K in the Seattle area *might* make $30K in the rust belt, assuming they can find a job at all. So when it's a choice of staying somewhere with a job, but deal with a crappy apartment and a long commute... versus move to someplace without a job... I'm not sure there's much of a choice available there.
