> The average home in 1960 was like 1600 sq ft, now its like 2800 sq ft.
Statements like this are not particularly meaningful unless there is actually a supply of 1600 sqft houses that are proportionally cheaper, otherwise you're just implying a causal relationship with no evidence.
Supply is driven by demand unless there is a monopoly in house building (there isn't). If this wasn't the case, one could quickly become a billionaire by starting first company that build small houses that are supposedly in demand but not provided by the market
All this means is there are enough buyers who can afford 2,800 sqft houses to keep builders from wasting a lot on a 1,600 sqft house. There could be a lot more people who want a cheaper 1,600 sqft house (including some of the 2,800 sqft house buyers!) than who want 2,800 sqft houses, but the market will keep delivering the latter as long as the return is better (for the return to improve for 1,600 sqft houses, see about convincing towns and cities to allow smaller lots, smaller setbacks, et c).
Zoning laws still influence rural prices! People fled expensive cities to more affordable rural areas due to city zoning, and that drove up prices in short term, as construction lags demand. Other factors (material costs, construction labor costs) had influence too
Well, people and local government in most other countries have no option to set expansive zoning restrictions. It's the rules set up on higher level that enable this system
You're still presupposing that there's a linear (or at least linear enough to be significant amongst the myriad other factors involved) relationship between square footage of house and cost. And that that relationship extends arbitrarily downwards as you reduce the square footage.
It's one of the main factors. And it can be reduced to almost nothing if a small single family housing zone is turned into a skyscraper providing accommodation for thousands
By the same token, why stop at 1.5M and not build a 15M mansion? Or 150M palace? Because you need to build what will meet the demand, not just most expensive thing ever that nobody will buy. Capitalism is the most effective mechanism to satisfy market demand for every group, if unrestricted by well meanjng but poor regulation that distorts the market
Statements like this are not particularly meaningful unless there is actually a supply of 1600 sqft houses that are proportionally cheaper, otherwise you're just implying a causal relationship with no evidence.