What if you unsave 2 items and save 1. Is then the list remade?
No, the list is never remade. The new item just gets inserted into the list, exactly the same as if it had never reached the limit in the first place.
why would they make the limit so low?
Not sure, the 1000 limit is in the file from its very first version 10 years ago: https://github.com/reddit-archive/reddit/commit/33fd4e9684ca...
1000 probably seemed like a lot at the time or had reasonable performance, and it's just never been changed.
Imagine I have a list of max length 5, when I initially fill it up it looks like [5, 4, 3, 2, 1]. If I save one more thing, it adds 6 at the front, then truncates the list and removes the 1 from the end, so now you have [6, 5, 4, 3, 2]. At that point, if I unsave #3, it just removes it from the list so you'd have [6, 5, 4, 2]. #1 is still saved, but nothing happens to pull it back into the list.