Cheaper sure, but a large fraction of the difference is that extra 1.5 bathroom and fancy kitchen. Plus all the other little difference like more larger and nicer windows.

Exactly; those are the things that are needed to turn "smaller more affordable homes would be a better solution" into reality.

I’m not sure I get your point. If the utility of a home is largely a function of size, but the cost is largely a function of location and amenities then there’s little benefit to specifically building smaller homes rather than less expensive homes.

No one is seeking to build smaller; they're seeking to build less expensive.

Building smaller (specifically reducing square footage, baths, and kitchen amenities [which are a mix of size and non-size elements], and using less land [going up, sharing walls/roofs, etc.]) is the mechanism by which the goal of less expensive can be met.

“Size” within the normal range of homes is only going to save you 2-5% on its own. It’s not useless, but doesn’t actually make that meaningful of difference while significantly impacting the homes utility.

Amenities on the other hand can literally 2X+ the cost of a home.