Up until 2017, the price of a house had been creeping up, but so had the size of the median house. One you adjust for inflation and square foot, it was pretty steady.[0]
This has absolutely no relevance to housing prices. I can't go to a store, see that 2k square feet is too much, and ask for 500 square feet. Housing is all or nothing. You either rent or buy an entire unit, or none of it.
There is no option to rent 500 square feet because it's illegal in most cities to have units smaller than 600-750 square feet.
Like most of the housing crisises: racists mostly. Because for a glorious-to-them moment in time they could keep minorities and other undesirables priced out.
This is a good point people often miss. It's not that houses are more expensive today in (hrs worked / square foot) people just work more for a larger house.
I think the takeaway isn't that material living standard in the U.S.A. have declined but that they've only increased a little.
There is no option to rent 500 square feet because it's illegal in most cities to have units smaller than 600-750 square feet.