This research applies externality theory to the housing problem in tourism communities.With the development of the study on tourism realty, the externality theory has become an important research approach.There exists a widely accepted consensus that prominent positive externalities exist between the tourism and the realty industry including the housing sector. So the tourism real estate has been an important impetus of the economic development of the tourism cities. But with the development of tourism realty, the negative externalities in housing market of tourism cities become conspicuous. This paper aims to conduct a study on the negative externalities in housing market of tourism cities and the correction strategies. The externality theory is applied to the housing problem in tourism cities. By looking back upon the relevant western literatures, the authors point out that the negative externalities mainly come from two sources:the strict regulatory planning and the phenomenon of second home. Firstly, the authors provide a background of this research and propound the question that why and how the tourism would have negative impact on the residents' housing status. Secondly, they give a brief introduction to the fundamental conception of externality and also include a review of the Chinese domestic literatures about the externality of the tourism realty industry. Thirdly, a short review of the western literatures on the cause of the externality is discussed. The authors recognize that the environmental regulations such as land use and zoning limiting, visual impact regulations and growth limitation and the phenomena of second home are negative externalities affecting the housing market. So the key to the problem is that the distribution of the externalities' costs and the benefit among the relevant parties is severely unfair. Fourthly, the authors point out that the Pigou approach and the Coase approach are feasible for the Chinese local governments to correct the negative externalities. The result shows that Chinese local governments of tourism cities should take necessary measures to correct the negative externalities in the housing market in order to ensure the housing needs of the local inhabitants.