I have a tool that I'm not using right now, I will lend it to you under the condition that you bring it back to me tomorrow when I'll need it ... Investments and lending work exactly like that
Except that they don't, at least not any more.
With the repeal of Glass-Steagal (Gramm et al 1999), and especially reserve requirements (Paulson 2004), banks were now free both to lend out money they did not have (they only have your promise to work up the money and pay later, and the (tee-hee!) "collateral" of the property), and to speculate in hedges and derivatives to pretend that the risk had been negated rather than just moved out of sight.
Huge chunks of credit (NOT money) were inflated into existence in this way, with everyone believing in the existence of this new "wealth" that would surely come in as loans were paid off by the newly "wealthy". Result:a runaway bubble in RE prices (NOT values).
If things worked as you say, the current Depression (NOT recession, NOT recovery) could not have happened. Instead we have the .gov and Fed pumping up 12% p.a. of GDP with *more* credit, worsening the result when the inevitable reversion to the mean happens, the creditors discover they've been sold an empty promise (a slowing in credit expansion now causes GDP contraction and unemployment, and unemployed people do not pay back loans OR pay taxes).
Banks (creditors) have been scrambling to put off that day by counting HELOCs on defaulted houses at par (Kanjorski 2009), dawdling for *years* on foreclosures, and borrowing from the FED at 0% interest then sitting on the money (remember all those "waah, banks aren't lending the stimulus money" stories?).
I'd love to live in an economy that works as you describe, but its capital has been hollowed out and replaced with credit, with real wealth replaced by claims on an uncertain future, claims which have ballooned to many times what even sovereign nations can pay (Iceland, Ireland, Greece, with Italy,Spain, France, England, Germany, and the USA on deck).
The banks aren't just knocking houses down to create scarcity - they're knocking them down (after letting them go moldy) to be able to account for them differently so they avoid eating the loss, and *still* avoid local taxes.