Why does higher supply reduce prices?
There is 1 house for sale and 4 buyers with maximum bids:
A: $600k, B: $500k, C: $400k, D: $300k
The market price is the highest losing bid, since this means the winner can outbid the losers.
With one house, A wins, and B,C,D lose. B's bid is $500k, so this is the price paid by A.
Now add a 2nd home. Here, both A and B win, so A doesn't need to outbid B. Instead, A and B only need to outbid C, so the price is $400k.
Similarly, with 3 houses, D's bid sets the price at $300k.
Lesson: higher supply means fewer buyers you need to outbid, and hence a lower price.