In the long run it's only redistribution, and redistribution is a good thing: Thoughts on the subprime crisis, part 1
Assume house prices fall by 50%. Heck, assume stock prices also fall by 50%. As Tyler Cowen notes, no houses are dynamited. No factories are burned to the ground. No people are shot. In short, no resources are used up. We, as a society, have exactly as much material wealth as we did before.
At the end of the day, a massive fall in asset prices is nothing more than a transfer of resources from people that hold a lot of assets to people that hold few assets.
In fact, it is very difficult to argue that a fall in asset prices is not in fact a good thing. Asset-heavy individuals tend to be rich(er) than asset-light individuals. We, society, value redistribution. In fact, we value it so much that we impose highly distortionary taxes to achieve it. A massive fall in asset prices means that we now get a lot of redistribution with none of the distortionary effects.
One more thing: Tyler says 'Most of the costs of overinvestment in housing already have been borne in the form of lower living standards, namely we have fewer non-housing goods and services.' Of course, this implies that as P went up, Q supplied went up as well - but the housing market is a bit different to regular markets. In crowded European cities at least, Q is constained by the planning system, which responds to price changes very slowly and not necessarily in the direction a profit maximising supplier would. Given that the opportunity cost of utilising your land for housing is extremely low (how much do you think agricultural land is worth?) if you can get permission to build you do so as long as construction costs are less than the price the house will command (a near certainty for any development reasonably near to civilization).
In other words, high house prices are unlikely to have had a massive effect on building activity, thus driving a misallocation of resources on a grand scale. Strictly speaking, it is the land price bubble that burst; not the housing bubble.