1/3 you can think of the housing market as like a game of musical chairs in reverse, where new supply has the effect of introducing additional chairs into the game.

2/3 When the music stops people can choose to sit on one of the new chairs, which frees up their current chair for others to sit on. People only shift to chairs that offer better price / quality bundle than their current chair. That is, moves make everyone better off.

3/3 In this way, new supply has three immediate effects. First, it increases space per person, reducing crowding. Second, it lower prices, as there's fewer people bidding for each house. And third, it improves quality, as crappy houses are less able to attract occupants.