No, your assumption is incorrect. "My sister" could own or live in more than one house (although she probably wouldn't be living in >1 at the same time) and the term my sister's house could apply to one of several of your sister's houses.
A: I'm going over to my sister's house.
B: Which one? The one she's had for 25 years or the one she just bought?
The house of my sister can be used pretty much anywhere that my sister's house can be, except it isn't–that is, it's a rare form that sounds stilted.
A house of my sister's can indicate that your sister has more than one house, but not because of "the (double) genitive" but because of the indefinite article. You can also say The house of my sister's and still be talking about the one house that your sister owns or lives in, or only one of them. You are now in the realm of articles, not possession or "the genitive" (which is a term borrowed from some other language and which only roughly applies to modern English, which has no real case system, as is indicated partially by the fact that we rarely say your phrase 2).