How would have implemented housing in XIV?

[Septonyte]

... the only issue, is that you would still have almost everyone going for larges and mediums leaving the smalls to always look like empty plots.

I mostly agree with this and I also didn't think of that. Maybe a price hike on mediums and larges would be a good way to slow that down. If there is no price hike then maybe a "stock house" selection for empty plots which includes yard setups.

I would also like to say that my dream plot is actually a specific small plot in Shirogane and I know a few players who want specific small plots for various reasons.

... this is more due to the design of small houses themselves. They simply aren't big enough. ... it almost immediately felt cramped to the point of being unpleasant...

I agree the size of a small house is way too small, especially the upper floor. Both floors should be at least as large as an apartment.

... SE should either add a third level to small houses, or increase the size of the two stories it has. Incidentally, even adjusting it so that the houses are two above-ground stories (vs. ground level and basement) would be an improvement; for people who are wanting to create a bedroom of sorts, the existing design is atrocious.

This too since I was part of an FC with a small house in the goblet. It was plot 46 and there is a tunnel under the house from the inner circle of The Goblet to the outer circle of The Goblet. The mind-screw for me was that the tunnel cuts straight through where the basement would be. We joked it was where we "hid the bodies". SE wouldn't even need to change the ward's small houses to be bigger, they could just say it is the same magic that allows 500 apartments to be attached to an FC.