I have a friend who's super passionate about this, currently wrapping up an environmental design degree with a long term plan of building houses out of shipping containers.
As I understand, it's more philosophical than financial - the main argument for having a "tiny" living space, as many of you seem to have discovered, is that it pretty much forces you to stop spending money on possessions.
Instead, you pretty much have to own less and spend less time in the privacy of your home and more out engaging the world and having "experiences" rather than "possessions." It's essentially the antithesis of the typical American "my house is my castle" attitude where you aspire to have a huge, sprawling McMansion filled with stuff
. That said, there's a fair amount of science that suggests spending money on experiences rather than things tends to lead to more happiness, although I would think this would pretty much force you to be an extrovert, which could be tough for some.
I kind of have it both ways, actually.
My place is a two bedroom condo (one of which I use as a studio room) measuring about a thousand square feet, but it's smack in the center of one of the hottest up-and-coming neighborhoods in the greater Boston area, so I ALSO have a McMansion-sized mortgage.
No regrets, though - I like the place, it's a very comfortable size for me that still allows me to entertain easily, and I put 5% down and was still able to refi out of PMI in just over one year because the market is so hot right now.
I think I'd struggle with a smaller space than I'm in now... but the circle of friends where I have the friend really into this and I have speculated fairly seriously about buying land somewhere and building ourselves "tiny houses" there as a vacation house. For somewhere where you go there occasionally to go out and do something - hang out on a lake or at the ocean, climb mountains or ski, use it as a base of operations for long road bike rides, etc - a small house makes a LOT more sense to me.