Eventually all those housing units will sell but in the meantime, anything repo’d will be empty for a while. That will decrease the gross effective supply from where it might otherwise have been.
Whether that translates into effective demand is another matter. If the economy is bad enough, habitation density might increase rapidly (like during the depression). If this were followed by an expansion, there would then be a demand crisis (this is why many houses in North Park have apartments added in the back yard in the mid to late 1940’s).

It really comes down to an issue of the tension between the timing of the housing market and the timing of the broader economy.

The irony of course is that housing has gotten so bloated in the last 50 years that it is now a cause and an effect. (eg: housing drops because of job loss which lowers broader net worth which slows business which causes job losses)
Most recent history (like the last century) does not look quite this circular. And it really is something that could lead to much broader and deeper poverty and political instability (which would also slow the economy). Fun times.