What's missing from this article: a correction for the quality of the housing. That houses are 40% more expensive is hardly surprising when they are also 40% larger.
A fancy kitchen might correlate to fewer restaurant meals and less prepared food purchases.
A media room might correlate to less money spent on theater or movie tickets.
Sure, there needs to be a budget, but your post denies that household spending can be reallocated from one column to another.
I doubt anybody would claim my entertainment budget is "austere", but it is substantially reduced from what it was when we lived in a smaller place. We almost completely stopped ordering out on weekdays, and we eat out about half as much as we used to on weekends.
We went from buying everything, to buying only things we don't know how to cook, or that are a pain to cook.
Look at houses in the same neighborhood (better: same street) with zillow.com. You'll notice that square footage directly relates to price.
Their estimates are interesting to look at, but are subject to error from many sources. A place with bad paint, a cracked/shifting foundation, termites, no central heat and a bad roof doesn't have those things properly accounted for. Also, one nearby property selling unusually high or low for some odd reason with throw off the numbers for the other properties nearby. I saw that with a apartment to condo conversion where the last unit went to a family member of the developer for a much lower price. As the other units sold, local houses were seeing a rise, when that last one sold there was a $30,000 drop.
Even actual selling prices aren't too reliable of an indicator now with such a disturbed market. Bankruptcy sales (or panic sales to avoid bankruptcy) certainly can distort values.
It'll vary with the market, but I think I'd feel safer testing estimated value against other criteria. The price is a fairly safe one if rental income could cover payments on a 30 yr fixed loan for 90% of the amount (the rest being the down payment). At least that method isn't so easily disturbed by erratic pricing nearby.