It's more complicated than that, but you get the idea.
I think it's more complicated than that - certainly $100K houses would not be the same size and features as $200K one, and when determining the price estimates, this is usually taken into account - 1bd/1br is not the same as 3bd/3br.
If houses in a neighborhood were sold strictly on a price / sq. foot basis, there probably wouldn't be much devaluation, in fact you would probably get an increase valuation based the costs incurred to just build a house without regards to sq footage. (meaning the first $125K is the first 1000 sq feet and the 2nd 1000 is only $75K more.
Average home value is largely meaningless if you are averaging substantially different houses. It only has meaning if we're talking about heterogeneous neighborhood or about something like a large area in rough comparison with another large area. Well, maybe not entirely meaningless as you still can get rough indicator of "price level", but useless in comparing the effect of this or that measure. It's like the reverse of the joke when Bill Gates walks into a pub and average income of everybody in the pub doubles. May be technically true but not a useful measure of anything.
That must be a really big pub or have started out with some very rich people in it to have only doubled.