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There's nothing wrong with selective breeding. But selective breeding for profit and/or for competitive advantage is an entirely different matter. It's the latter that results in overbreeding.

Is it though? - Are there really too many highly bred horses out there? - Or so many backyard grade horses that are bred that the market is flooded with those?

Horses are now luxuries and pets only. Their highest purpose is now being a hobby for people to enjoy, whether that is through participation in sport or from watching. Selective breeding won't exist unless they are being bred ~for~ something that has a profit motive. With horse competition, they are creating their own market of fanciers and fans of a breed, that I believe creates more homes for horses and improved care of them.

If the highly bred but not quite winning castoffs from breeding farms were the stock we had to shop from when looking for our pets, we would not have too many. It is my neighbor kicking out very average and unremarkable foals every year that is adding to the glut.