For some people, downsizing in the area of housing means selling off the vacation home. For others, it's finding a smaller house, or one in an area with a lower cost of living. Sometimes it means squatting. However it works for the culture of our family, a lot of money, and therefore, work hours, goes to support our housing. Americans live in far bigger houses than they used to. Also, despite the housing bubble popping, many areas of the country are still experiencing a rather high cost of living. Others, such as notorious Detroit, have become a mecca for American pioneers of the 21st century.
In some places, buying a house is cheaper than renting. However, because of the way loans are structured, it can take years of paying mortgage payments to make any sort of dent in the actual principle of a home. (Mortgage = death pledge) One way to get past this is to make additional principle payments.
I was lucky enough to live in an area with very low cost of living, and found a decent house for $25,000, with a $250 mortgage payment. For a year, I made double payments. I took some time off that to get out of credit card debt and adjust to halving our income. I realized only $30 a month was going to our principle, though, so I tried to pay an additional $30 a month. We made quite a dent in our principle after a few years.
I know people (single people mostly) that go from housesit to WWOOF to couchsurf and get by. Others have work-rent trade agreements, while still others live in cooperative housing. Some rent out a room or basement. I have had friends that squat, though I think this is harder or more risky when you have children. However, considering the VAST amount of houses without people owned by far away companies, I think it might be easier to squat now than ever before.
There are other considerations as well, like living in a place that does not require a/c or a lot of heat--like finding a house with trees that shade it, good insulated windows, passive heating/cooling, etc. Can you have a garden? Raise animals? Dry your clothes the old-fashioned solar powered way? Walk to the grocery store, bank, etc.? Live without a car? Have a good community of people near you? There are a lot of external variables that can raise or lower what you spend, depending on all those lovely externalities.
I think the main idea is to spend as little as possible while maintaining your comfort zone. Of course, if you are adventurous, it's a lot of fun to expand your comfort zone, making it easier to live while spending as little as possible.