Wooow indeed. I was just about to post "can't replicate it", but now I can.
It seems the difference is that with the "custom color" button, Settings applies the colour directly to the background, whereas the plus button at the bottom only applies it when you're done. Applying it directly seems to be computationally expensive (ass various elements of the UI need to figure out whether to render their text in black or white, depending on the colour - would be my guess at least).
Interesting, yeah. It doesn't happen when adding a new color to the "Colours" row at the bottom even though this happens with the same color selection UI widget.
I see this Custom Colour thingie at the top-right corner of the Wallpaper section, above a "Show on all Spaces" checkbox and left of a fairly big representation of the current desktop background.
After a bit of tinkering: this Custom Colour element is replaced with something else depending on the current background mode. If you selected a wallpaper image, it shows the name of the wallpaper. If you select a predefined colour, it shows the name of the color. When adding a custom colour, it will show an interactive element which allows to change the color in place, and that shows the buggy behaviour for me.
Ok, this at least explains why other people don't stumble over this as an obvious bug, I assumed it would be obvious, because the first thing I always do on a new Mac is to customize the background color by right-clicking the desktop, and since that moment I have that buggy Custom Colour element sitting there.
Not a great UX either way though.
PS: ...and now after adding a new custom color via the to bottom row of predefined colors, the bug in the 'Custom Colour' widget is gone and nobody will believe me it was ever there. Great :D
PPS: nope, it's coming back after going through the 'desktop => right-click => change wallpaper...' route again, phew.
I tried it, and apparently if you click if from the "+" button, it works totally okay for this popup and subsequent opening of that custom color popup, BUT, if you close the settings, open them again and press the "Custom Colour" colour directly, you will enter the bugged one.
Closing and reopening Settings seems to be the missed requirement. I'd disagree with the original assertion that a pro tester would find this in five minutes. The steps to repro are not nearly as simple as originally implied. In fact, they are narrow enough that I'm willing to forgive Apple missing it. (Not fixing it, OTOH, after it's been reported...)
Yup, I've been following along and I also finally got the bugged one by: reopening Change Wallpaper after having closed it with a custom color being selected; and then clicking "custom color".
In a way it's a perfect little example of how a bug can seem obscure to some (most) users/developers but seem glaring and unacceptable to a few (the few who happen to use the relevant feature a lot).
If some engineer at Apple ever gets to fixing this, that would make an exceptional story! Really interesting WHY these circumstances exactly lead to the bugged popup, I can't even imagine what's going wrong there.
It is not straightforward – first, you need to choose a custom colour via Wallpaper settings menu Colours section, by clicking on "+" button and choosing any custom colour, THEN, at the top section of this settings menu, a "Custom Colour" box appears with your chosen colour. IF you close the settings, and open them again, clicking on this custom colour will open the bugged popup, where dragging the cursor around is certainly taking more frames that it should, resulting in it lagging crazy
I was able to reproduce this, but only by following your very specific set of instructions. Never in a million years would I have found this on my own.
Sequoia 15.3.1 (24D70)