He seems to be saying that we say, "I used to be happy when I lived there" not, "I would be happy when I lived there". (Being happy is a state, 'be' is a stative verb, so you can see that they mean slightly different things.)
However, I disagree that we never use "would" with stative verbs/states.
"Every time she she did that, I would become angry."
"Whenever she did what I wanted, I would be happy."
What examples does your author give?
Student or Learner