I'm actively searching for a house to buy - smaller than the one that what I grew up in - and while you're right about people wanting more space, it does not matter. Homes are disproportionally more expensive than they were in the 80s

Is it demand or is it a question of builders wanting to maximize profits by building larger homes vs small starter homes?

https://realestate.usnews.com/real-estate/articles/what-is-a-starter-home

Data from the Census Bureau shows that 40% of homes constructed in 1980 were considered entry-level homes. In 2019, only 7% of homes were entry-level, according to a 2021 report from Freddie Mac, and almost every state is building fewer starter homes.

“Because of the cost of labor and supplies, builders are mainly focused on building more expensive homes, since it no longer makes sense for them to build more affordable homes,” Carlton says.