That is to say, I hope we don't "creatively destroy" the houses that were (over)built. Sure, some can be creatively transformed into restaurants, business offices, etc., to attenuate the misallocation in the short-run, but there's no need to tear them down and replace them.
But given both zoning laws/neighborhood covenants/HOA rules and the form of much US housing development (single family home, set back from the street), very little new development can be "creatively transformed." If there's an oversupply of housing stock there isn't too much use substitution that can be done, at least in many parts of the country. It's also difficult if not impossible to convert from single family homes to multiple units.
The point being that if one could easily convert homes into restaurants or offices, then the price reductions resulting from an oversupply of residential development would be mitigated as some units could be converted into other uses. But in many areas, houses are just houses, though they may not actually be safe as houses...
The ground floor of my building, while now a residential rental unit, has been both retail and professional office at some point in its history, and could easily be again.