New subdivisions are full of large houses and almost empty of small ones. The modest first home has not become unpopular, and the reason it is rarely built is arithmetic on the builder's side.
Fixed costs do not shrink with the house
Every home requires a lot, a foundation, utility connections, a driveway, permits, inspections, a kitchen and at least one bathroom.
Those costs are close to identical whether the finished house is small or large, and they must be recovered from the sale price either way.
Adding square footage is comparatively cheap, since the marginal cost of extra floor area is mostly framing and finishes.
Land is priced by the lot, not by the building
In most metropolitan areas the land under a house is a large share of its price, and that share has grown.
A builder paying a high price for a parcel will not put an inexpensive house on it, because the land cost alone consumes most of the sale price.
Where land is cheap, small homes are still built. The pattern tracks land values closely.
Zoning determines how small a lot may be
Minimum lot sizes, setback requirements, parking minimums and limits on units per parcel all constrain how much land each home must consume.
Where a rule requires a large lot per dwelling, the land cost per home is fixed at a high level regardless of what is built on it.
Local rules on frontage, height and unit counts therefore have a direct effect on which price points are possible.
Permitting time is a cost that favours larger projects
Approval periods are measured in months or years, during which the builder is paying to hold land and carrying financing.
That cost is spread across the homes eventually sold, so a longer process pushes builders toward higher-value units that can absorb it.
Smaller builders, who historically produced much of the modest housing stock, are least able to fund long approval timelines.
The gap is being filled from the other direction
Where rules have been changed to allow smaller units on existing lots, including accessory dwellings and duplex conversions, that housing does get built.
Manufactured and modular construction addresses the same problem by cutting the build cost, though financing for those homes remains harder to obtain than for conventional construction.
What has disappeared is not demand or capability but the combination of land price and permitted density that once made a small new house profitable.