It will change the dynamics of buying a house but after a period of everyone figuring the new system out, things will be back to the way it always was. The possibility of writing off the interest was only a small factor in my decision to buy a house.
If as you suggest that home buying will drop off significantly, you are then implying that more people will rent than own. Of course this will increase the cost to rent so people will begin to buy so they can rent it or buy to avoid paying so much in rent.
It costs me less to own than to rent and since I own, I can do with the yard as I wish and if I want a dog or any pet that is up to me. So I think the real estate business might be impacted during the adjustment but after that it will be business as usual.