East Riding Council challenged Housing Secretary Michael Gove and Gladman Developments over a decision to grant planning permission on appeal to build 380 homes off The Balk in Pocklington and another 150 homes on paddock land at Swanland.
The decision of planning inspector Claire Searson overturned the council's earlier refusal of planning permission.
East Riding Council went to the High Court to challenge the way in which the decision was made.
However Mr Justice Dove has rejected the council's claims and backed the planning inspector's decision.
Wolds Weighton councillor Mike Stathers said enough homes had been built in Pocklington in the last ten years, adding: "It is probably the worst bit of news we could have had in terms of our housing strategy. We just need to make sure this doesn't open the floodgates to speculative development across the East Riding.
"We are extremely disappointed.
"The vast majority would have said no to Gladman - it does nothing but bring more congestion and traffic to the town.
"We can't put this huge number of houses in without working closely on infrastructure. It puts more prssure on local health services and they will also need to look carefully at any additional pressure on schools."
Mr Stathers said he's been told it would cost £20,000 to mount the legal challenge - a figure disputed by opposition Liberal Democrats. "I don't know the final figure but whatever the figure is I think it is money worth spending in the hope we could be successful at this appeal.
"There were only small numbers of people who said we shouldn't be spending the money, the majority wanted us to see the fight through."
Gladman Developments has been approached for a comment.
Meanwhile East Riding Council has lost another appeal over the development of 110 houses off New Walk at Driffield.
The council approved the plans in 2019, with a condition that developer G P Atkin Homes Ltd make improvements to a nearby level crossing, following safety concerns.
However a planning inspector has now allowed an appeal by the developer to remove the condition, saying other developments in the area have contributed to increasing numbers using the "high risk" Meadow Lane crossing, and not just the appeal development site. Network Rail had first raised the issue back in 2008.
The inspector described the condition as "unreasonable, unenforceable and imprecise" and granted a new planning permission.