Even in areas where building is effectively unlimited, land is effectively free (or less than $5k/acre) a new house is still moderately expensive. There's a minimum price below which you cannot realistically go, because of flat-cost items, and minimum building requirements.
So you end up where a smallish house costs $200k to build/sell at a modest profit, and a nice large house costs not terribly much more but can be sold at a much higher profit margin.
Sure, but those costs (including land costs) are reduced with triplexes/quadplexes/townhomes, which require moving a mountain to get approved in most zoning districts.
In Oregon we recently re-legalized 4-plexes and some other, denser forms of housing by right in our cities. But it's a pretty incrementalist reform, and it'll take time to see the effects.
The quadplexes have to age and trickledown to being boring housing stock; around here the apartments and quads are going for about the same as older stand-alones and only a bit cheaper than new stand-alones. And when you factor in the usual HOA cost the payment ends up being the same.
So you end up where a smallish house costs $200k to build/sell at a modest profit, and a nice large house costs not terribly much more but can be sold at a much higher profit margin.