The buyers of the 3500sf house are aware of the current big market now of 2200sf homes at that price point, so they sell now when they can get a good return. But they are also banking that the young families buying 2200sf now, with toddlers, are going to feel trapped in that space with teens.
You missed the word 'once'. This happened 30 years ago. They bought a house near us and stayed the 20 years we did. And they had only owned the house for 10years. 2200sf was adequate for us with teens, way better than the 1500 we moved from. But it’s true that now there aren’t enough small houses.