Are there any hostels or similar accommodation in the highlands along route 175 from Oaxaca City to Pochutla?

Upvote:4

Yes!

I got lucky with one of many Google and Google Maps searches and found just what I was looking for.

The "town in the clouds" is called "San Jose del PacΓ­ficio" and is 138km from Oaxaca City and 103km from Pochutla. Its elevation is around 8,000 feet or 2,500 metres.

It seems there are now several hostels or cheap accommodation with dorms but the one everybody mentions by name is "Hostal de DoΓ±a Catalina".

Wikivoyage even has a page on the place!

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