We live in a 800 sq ft house. There are two grown-ups, two teenaged girls, 2 dogs and 3 cats. We have 2 bedrooms: the girls share a 10 by 10 ft space with one of them having to use part of a closet in the "master" bedroom. Of course only one bathroom. Luckily we're in a temperate climate and can be outside 90% of the time. We also have a large enough property to have two other separate, albeit small, buildings one for storage the other an outrageous playhouse (2 stories) built when the girls were young. I think the climate is the only saving grace for us!
Living in the SF Bay area, we couldn't have afforded anything bigger until recently and early on decided we'd rather not pay a huge mortgage under any circumstances and
particularly not now when the kids will be off on their own in a few years. We have a $760 mortgage and will be paid off in about 13 years. FREEDOM!

It also helps that when we were first married and until my oldest was crawling, we lived on a boat with NO room (the shower was on the back deck

)