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

This is developers maximizing profit per lot.

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).

> 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.

So there's a limited supply of lots (or of permission to use those lots).

Exactly. Zoning laws affect lot sizes, remove them as in Houston or most other countries and the problem disappears.

Rural America often doesn’t have “zoning laws”. That hasn’t stopped my home price from more than doubling since 2012.

There’s multiple factors. Another is the zero interest rate era which inflated all asset prices. Money has been insanely cheap for a long time.

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

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

> Supply is driven by demand unless there is a monopoly in house building (there isn't).

There is, however, a monopoly on issuing building permits.

Bingo! And that's on government. Remove (or relax) those now by decree and rent prices drop tomorrow

Government? Or the people? These are local government issues, they're not that far detached from the people who elect them.

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

Why build a 500k house on your expensive lot when you can build a 1.5M house. Capitalism does not in any way optimize for the middle class

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