It is always about money. As mentioned small home cost only slightly less to build but has a much smaller market. I'm guessing that the construction cost of a $250k 2000 sqft house hsa a $100k builiding and $50k land. If you shrink it down to 1000 sqft it would still take about 75% of the land and the construction cost would still probably be $80k (you are only shrinking roof, wall, floor, but still has the same amount of kitchen and bath stuff to deal with, and the permitting etc). People just won't buy something much smaller for only slightly cheaper.
If you want these small houses you have to buy really old, and remodel it yourself. Why not just buy a condo or an old house?
If you want these small houses you have to buy really old, and remodel it yourself. Why not just buy a condo or an old house?