First rings in most western cities are already part of the inner city now. San Diego's streetcar suburbs are now inner city neighborhoods like Hillcrest and City Heights.. and new development there reflects not single family homes but rather multi-unit development. Yes, the old stock is single family homes but when those fall down, they are not being replaced by single family homes. Densities are limited by Euclidean zoning, of course, which just means astronomical pricing. Remember, these cities were compact to begin with, so the first rings are often in walking or easy transit distance of the old CBDs Even second ring burbs (which have fewer restrictions than the inner ring on infill densities) like Kearny Mesa in San Diego, Clairemont and University City are now going up. There are huge areas of UC (outer second ring developed as SFDs in the late 1950s through to the late 1970s) being infilled with highrise product coming in at FARs 8+, with 80 per acre perimeter blocks punctured by the occasional 30 story towers. Things are changing.
On your question relating to living in sardine cans, the question for most cities in faster growing areas of the country is not whether people WANT to live that way, but rather what they can prudently afford without a government handout. I'm sure a lot of people WANT to live in a 4,000 sq ft house on a half acre lot. But they can't afford it.. and they only were fooled into thinking they could by the GSE lending scam that came crashing down from 2006 to now. Now, with 40% of total US housing stock valuation wiped out and valuations around the country still artificially inflated due to the cheap money out there, we live in a fundamentally different reality. people will just have to accept that what they can afford will probably be dictated, within 5 or 10 years, by 20% down and a 10 year mortgage. Even developers will be able to secure construction capital only on a fully secured basis, which, for the record, means that homes will be sold with preexisting liens on them, further limiting mortgage opportnuities (this new horror is only just now becoming apparent... I went to a legal briefing today where a panel of attorneys basically said that this unspeakable phenomenon is the very best deal that builders in many regions will now be offered.. the conclusion was pretty much that the future of the single family home is basically armageddon). This latter horror may be the case regardless of whatever the government resolution to the GSE crisis will ultimately be. In fact, if the GSEs don't get resolved, I would imagine the constructor financing terms will be even worse. Which maens either consumer finance won't be available (beceause the GSEs will go away) or builder finance won't be available. Either way, the single family home is probably toast for most markets (save for the wealthiest, who can of course have whatever they please).
If this means living in a sardine can, then so be it. Either that or Buffalo and Detroit will be our next boom towns. You can only have what you can afford. Which means that you have a choice: your future is either Cleveland and no job or a rented sardine can in a place that offers the prospect of gainful full-time employment. Welcome to post-indigestion America.

It is fast becoming clear that it is simply impossible to overstate how royally ***** we are.