> meaning a 1500 sq. foot house won't be 1/2 the cost as a 3000 sq. foot house in the same neighborhood, but it will be lower and push down the average home value.

Average home value is largely meaningless if you are averaging substantially different houses. It only has meaning if we're talking about heterogeneous neighborhood or about something like a large area in rough comparison with another large area. Well, maybe not entirely meaningless as you still can get rough indicator of "price level", but useless in comparing the effect of this or that measure. It's like the reverse of the joke when Bill Gates walks into a pub and average income of everybody in the pub doubles. May be technically true but not a useful measure of anything.