Good grief. Where to begin?
1. You said your state has a law. What you provided was (sort of -- see #2 below) a booklet by the Michigan Office of Highway Safety Planning. Even giving you the benefit of the doubt that you live in Michigan and didn't just paste in the first Google hit you found, this isn't a Michigan law.
2. The text you put in quotation marks before the web link isn't in the linked document. You seem to have stitched the two together. Back to my Google hit theory.
3. Right out of the chute on page 3, the booklet (first written back in the 70s, mind you) discusses the increasingly blurred distinction between rural and urban areas and thus the need to establish "modified speed limits in these transitions between rural and urban areas." This would be your first clue that this booklet might not be about setting speed limits in residential neighborhoods.
4. Removing all doubt, on page 7 the booklet discusses the difference between statutory speed limits (i.e., those actually set by the legislature) and modified speed limits (those set by administrative agencies). It explains that modified speed limits are "utilized in areas requiring speed limits between the statutory maximum speed limits on state and county roadways and the 25 mph prima facie speed limits in business and residential areas." Then at the bottom of the page, it says: "The remainder of this booklet describes how modified speed limits are established..."
So, in sum, even ignoring the fact that the quote and citation you provided don't match, you, in the midst of a discussion about speed limits in residential neighborhoods, provided as support of your contention that residential speed limits should be determined by some kind of a prevailing speed rule, a booklet that says in so many words that it doesn't apply to residential speed limits, which are universally set (by Michigan statute) at 25 mph. Your source actually contradicts your position rather than supporting it.