I think that SE is looking at the wealth that FCs have, seeing that most FCs have enough money to buy a small house, and then seeing that people aren't buying them.

And yeah, the real problem with S houses isn't the price (though that is an issue that is shared by plots of land of all sizes), but the fact that they're so tiny. That's why people don't buy them.

The current (well, as of last night) status of housing on the Phoenix server is this:

1 L house, 4 M houses and 4 S houses in Mist.
3 S houses in Lavender Beds.
1 S house in The Goblet.

Given the pricing and number of plots in each ward, (3 L, 5 M and 22 S?) SE was expecting to see a lot more S houses in comparison to M size at least.

My FC actually has the gil to buy 3 S houses already, but they're so tiny. Even the M house (that we're going after) feels a bit small.