They already have instancing in place that handles who-knows-how-many players, across who-knows-how-many dungeons and other instanced areas at any given time. They can clearly handle high-stress, high-volume instancing scenarios.
If it is a case of them keeping everything server side, well, then that's a problem for them to work out. And I have full faith that they could and would, if they felt it was important enough to address. They'd have to change things up, reallocate resources and such, but I'm confident they could do it.
Generally speaking...
At this point, with how much SE has accomplished with this game, that some people are still so quick to believe they can't do something, simply because they haven't yet, is mind-boggling.
People thought 1.x could never be improved enough to be playable, or worth a subscription to anyone. SE turned around, improved 1.x, and managed to not only get people to pay a sub, but tripled the number of players playing besides (all those names in the credits of 2.0 are not all of them; not everyone got their name in the credits).
People thought 2.0 could never happen. That a MMO could never get a second chance, and that SE would never succeed with it; that it would crash and burn a second time. Yet, they did the impossible, and didexactly what most everyone said they couldn't.
People insisted that large, sprawling open areas could never be done "because PS3 limitations". SE turns around and delivers us Heavensward, with massive open areas, that you can see clear across from some vantage points.
And so on.
Yet, here we are again with people quick to assume SE can't perform improvements/changes to a housing system - which are greatly needed - for whatever reasons.
I can be skeptical about things... Very skeptical. I was one of the people who believed 2.0 would crash and burn for a time (specifically around its final betas and launch). Still, even I reached the point where I had to acknowledge that what seemed "impossible" to me (and others), was quite within SE's capacity to do... if they set themselves to doing it. At some point, you have to start giving them benefit of the doubt, I think.
I don't buy for a second that turning the housing situation around completely is a matter of "can they do it". I believe it's a question of "will they do it".