The problem with point 4 is that no developers are going to undertake it unless they can make a significant profit. If the addition of new housing has the potential to lower the ROI where is the insentive to build?
Your assumption is that all builders have infinite flexibility and are exactly the same. The real world companies can’t just adjust their staffing and capital equipment based on last hour revenue. There is always someone will to cut into their margins to get a contract.
Imagine you are running one of those companies. You normally make 100k on this type of job, the market is willing to pay 90k. Do you walk or not? If you walk you still have to make payroll this week. Wouldn’t it be better to not make as much money as you want but still make money vs not making any money?
Capitalism is a far far from perfect system, but it really exceeds at racing to the bottom. Someone somewhere is willing to do x for less.