Parties are expensive, and one merely has to look at the host's other expenditures to determine what they can afford for entertainment. If a private house party will involve catering, a valet, servers, and a kitchen staff, it's a safe bet that they'll also be able to shell out a few grand for a good band.
So why do people cheap out on entertainment when they're spending all kinds of dough on other party accoutrements? A couple of reasons, I guess. They might not know how to go about finding a band, so they resort to asking someone they know personally. It's easy to locate a professional caterer or florist, but finding entertainment is often more a matter of "I have this buddy who plays in a band."
If said band isn't accustomed to negotiating deals for private parties, they are likely to be talked into playing for beer and food by said "friend." He does this with a clear conscience because he does not see the band as being on par with other event services. If the band dresses like average joes, lacks promo materials, doesn't have enough music for a four hour party, isn't versed in schmoozing potential clients, and/or doesn't have a contract ready to draw up at a moment's notice, then they aren't on par with other event services. They might only deserve beer and food. If they don't like the deal, they are free to say no, or up their game in an effort to command a higher fee.
Sometimes bands that are up to snuff don't value themselves highly enough. I've been guilty of this in other respects. I remember shooting and editing a wedding video for this couple, and them telling me that they spent more on a cheese plate than they did for my video. Yet they loved that video, and it was a wake up call for me that I was providing a valuable service for too cheap a price.
Private parties should be special opportunities for bands to earn, not volunteer. It's an area of the business that I actually know pretty well. I did sound for over 150 private events with my last variety/party band, including some house parties. The money is there. Granted, this was a professional group of musicians who could sight read, play in all styles, and look the part when the event required formal attire. They were booked through an agency that advertised and maintained a nice office in uptown. It's easy to blame people for wanting to gyp musicians, but the onus is on bands and entertainment companies to create services worth paying for, and to market, promote, and seal profitable contracts based on those services.
The band in the original post is described as "somewhat established." There you go. Moderately established means moderately compensated. Don't get offended.