While I can't speak to why they became popular in the first place, I can speak to why and when they fell out of favor with builders.

The Savings and Loans crisis of the the 1980's resulted in many regulatory reforms. There are many books on the subject but a good start from its impacts on regulatory reform is "Savings and Loans Crisis: Lessons of a Regulatory Failure" (ISBN-10: 1402078714).

For the purposes of this discussion, you just need to know that among the regulatory reforms was the desire to bring real estate appraising under universal standards. The Federal Financial Institutions Examination Council, which is a federal government interagency board, created the Appraisal Subcommittee in 1989, which in turn created a non-profit organization called the Appraisal Foundation, also in 1989. The Appraisal Foundation's stated purpose is to,

...set the Congressionally-authorized standards and qualifications for real estate appraisers, and provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals. This work advances the profession by ensuring that appraisals are independent, consistent, and objective.

You can read more about the Appraisal Foundation's history here.

One of the many standards that was adopted is how real estate appraisers measure a structure. Specifically ANSI Z765 (Square Footage - Method for Calculating).

One of the quirks of ANSI Z765 is that it divides finished areas into two categories "above grade" and "below grade". Also, the URAR (Uniform Residential Appraisal Report), which is the most commonly used appraisal report form, includes the Gross Living Area (or GLA) which only includes finished areas that are above grade.

So in other words, imagine a house that is on a slope and at the back of the house the slope comes 12" up the back wall. According to ANSI, the entirety of that level of the house can not be included in the GLA. In addition, real estate agents when listing properties on the Multiple Listing Service, are supposed to differentiate between the GLA and finished below grade areas.

You can probably see where this is going. In the typical split level home, that means almost a third of the finished area is not going to be listed in the same section with the rest of the finished area. In fact, even if the lower section of the split level is only sunken a couple of feet, it is going to be listed in the same section as a house with a completely underground finished basement, despite having windows.

So in 1989 with the adoption of these standard, people that have always believed they were living in a 1500 square foot house, suddenly were getting appraisals back that showed on Page 1 of their appraisal that they were living in a 1000 square foot house.

Of course, they didn't lose 500 square feet, rather it simply was being listed in a different part of the report. However from a marketing standpoint for home builders this was horrible.

So the TL:DR answer to your question is. The popularity of split-level homes nose dived in 1989 because of the adoption of the ANSI Z765 standard for measuring houses.

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