To be sure. But let us double cost to make the house bigger and double it again for the lot, labor and electric. You are still at $188,340.8.

Let us double it again for Nest thermostats and turret mounted gatling guns and you are still under 400k.

Something happened.

$200k buys a lot of house in the vast majority of American cities in 2016.

Let's see what we can do for one tenth that amount:

1,400 sqft -- http://www.zillow.com/homedetails/263-W-Ramsey-St-Pembina-ND...

750 sqft -- http://www.zillow.com/homedetails/705-W-Douglas-St-New-Dougl...

1,718 sqft -- http://www.zillow.com/homedetails/5-Allen-Ct-Stewartstown-NH...

That's a reasonable point, California is crazy and perhaps coloring my views.

The median price paid for a new home in Aug 2016 the US is $284,000 and the average is $353,600.

https://www.census.gov/construction/nrs/pdf/uspricemon.pdf

You can totally build a lavish 3000 square foot house for 400k in most of the US.

(the median price of new homes sales is about/under $300,000 https://www.census.gov/construction/nrs/pdf/uspricemon.pdf )

I already told you what happened. The maximum loan guarantee under the GI Bill was $2,000 (in their dollars)

4x the cost of your Sears house is $13,964 (also in their dollars).

The buyers preferred a house that they could afford to one they couldn't. Simple as that.

The builder gets their profit, too. In expensive housing markets, the price to buy a new house is almost the same as the price to build existing, comparable houses. The small handful of builders that manage to get permits to build a new neighborhood or apartment are making a killing today.