I can see where you're coming from, but I don't agree.
There's no reason at all that item balance and configuration couldn't have been changed while leaving the auction house in place. None. The fact that Blizzard presented it as such is a complete red herring.
If one chooses to "grind gold and spend hours on the AH searching through pages of gear to find an upgrade at a reasonable price," well, that's on you. Again, there's nothing forcing you to do that - especially if the item changes were made where it was easier to find good gear for yourself from your own drops.
While it's true that websites like that still existed even with the auction house, it's nothing but a good thing to give people a legitimate option as opposed to making anyone who wants to do that go to other websites for it.
Also, you may feel it gives "more of a sense of community to trade with people directly," but, I don't feel there's anything of a community in people spamming chats with advertisements. But, hey, if you like to do that, you could still do that even with the AH. Sure, many people might not have wanted to trade directly when they could get more on the AH - but that's just another sign that the AH was a superior option. And, even aside from that - frankly, I don't really care about a "sense of community." I pretty much play Diablo as a single-player game, and am not really very interested in participating in a "community."
Not everyone plays the game the same way, and forcing everyone into a particular playstyle when it doesn't need to be that way (and wasn't that way before - a change was made to make things more restrictive) is a definite negative.