Sure wasn't my experience when I was looking whether to buy or build a house.
Could get a "starter" house that was 80-100 years old, ~1200 sq. ft, in need of some repairs and generally a bit worn down due to age (but w/ some renovations for flooring/counters), no garage, townhouse or condo (shared walls), etc....
OR could spend 40-50% more and get a house built within the last few decades, twice the size, full garage and driveway, detached w/ a yard, no fixing up needed, plainly higher quality overall.
The amount "more" you got from buying past the bottom of the price listings was absolutely crazy. Unless you straight up can't afford a mortgage for the next tier up of housing, I have no idea why anyone would choose the "starter" house.
My real estate agent explained that the trend I noticed was true. Starter homes offer the absolute crappiest "return on investment" and outrageous "cost per square foot" because: a) there aren't many starter homes on the market so competition for them is fiercer b) starter homes are seen as a "good investment" b/c they can be quickly and easily re-sold so a lot get bought up by house flippers (who can also get the most bang for their buck renovating a run down starter home to sell for more vs. more costly houses) c) While not having a yard and being smaller reduce building costs somewhat, you still can't escape a lot of basic costs like utilities, foundation, government fees, etc... that any building will incur. Larger homes can "spread out" those base costs over their larger square footage, small starter homes cannot
TL;DR: No, quite the opposite. Starter homes are very hot sellers b/c some people need to take the cheapest thing they can get and investors like to flip them, so people being "unwilling to lower their standards" is not the issue.
I can basically agree with all of this.
At the time that we bought, a "starter" home would have been about 2/3rds the price of the SFH we ultimately bought. At that time, roughly $50k translated to an increase of about $125 to our mortgage so we made the correct decison to forgo the "starter" home altogether. For just under $1000 more, we basically almost doubled the square footage, much newer home in a much better area. It really was a no brainer.
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When it is obvious that the goals cannot be reached, don't adjust the goals, adjust the action steps. - Confucius