Didn't the fact that more familes moving to smaller homes around that time also play a role?
Honestly, I don't think it influenced much. Around that time, 1938, you had very little choice in RTR
scale model trains. Serious hobbyists had trouble accepting Lionel or Flyer O-gauge as realistic and O
scale already built-up locos were unbelievably expensive. At the same time, kits for these required a great deal of rather precise work and lots of time to complete (and weren't cheap either!). RTR American motive power in OO-gauge was, as I recall, largely limited to Lionel's rather pricey J-class Hudson model (or kit). Scale-looking C-D gauge (S) really hadn't yet taken hold.
In HO, you had some special-order, RTR, largely brass, models from Mantua but they they weren't cheap (2x-3x kit prices). If you weren't up to a lot of careful work, you could farm out your Varney or Mantua kit to one of a few guys who built your kits for you (some advertised in the back of MR), or you could go to a custom builder, just like for O-gauge. Examples of those cost about as much as some secondhand cars did at the time!
When Gilbert introduced its reasonably good looking, fully painted and decorated, RTR Hudson at a very reasonable price in '38, it was quite remarkable. Mass produced, instead of run off in small batches of a few hundred like the other loco manufacturers, the Hudson could be sold for what many loco (no tender!) kits retailed for. For the first time, it allowed those without well equipped workshops and real model building talent to enter the hobby and get started running trains virtually right away.
Just prior to our entering WWII, it was said that the majority of HO layouts included a Mantua Goat or a Varney Dockside for yard work and a Gilbert Hudson for mainline operations. This trend was re-enforced just after the war with the introduction of much higher quality loco kits by Mantua, Varney and MDC. An even greater impact came from Mantua's introduction of an ever expanding line of RTR HO locomotives (to be followed by PennLine, English, and others). In fact, MR claimed the number of hobbyists exploded from 16,000 in 1944 to 100,000 by around 1950!
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