Household Guards work as intended. They certainly don't need to be nerfed.
Yes, indeed, you can outfit them in absolutely best armor, and give them best-in-slot weapons.
And of course, wearing Silvered Perisno Runed Noble / Paladin Armor, armor and those fancy Paladin/Perisno helmets, wielding Skyfalls, Holy Maces / Gothic Maces, and Darkforest Bows... Riding Perisno Plated Chargers/Demon Plated Chargers... Yeah, they're going to be absolute monsters in a fight.
Of course, all that top-tier gear takes time and effort to acquire, and shouldn't it feel rewarding, anyway?
I don't see an issue here.
If you give the same gear to any other high-tier noble units, they'll show same, or better results.
It's to be expected. Gear makes the unit just as much as stats and proficiencies. Actually, even more so. Testing shows that a +5 increase in stats, even if combined with +50 in proficiencies, is still usually not enough to close the gap with someone who has a weapon dealing 4 more damage.
But I think that's up to the player. If you want to make the game arguably too easy by fielding 500-600 of them, sure. Go ahead.
The highest I've ever gone was 300, and even that was overkill.
You can also avoid outfitting them with top tier junk, and make them look cool, sharing a specific theme instead. This takes care of their OP-ness as well - they'll still perform well, but won't win battles for you.
Sure, you can give your hired mercs extremely good elven / fountain guard armors really early on in their development, and the infantry line gets access to beastly weapons like the Holy Mace or two-handed morningstars, or highelf swords.. it's up to the player how difficult they want to make their game, you know?
There are still good reasons to pick other units over them: morale bonuses, medicine bonuses, pathfinding bonuses, cost effectiveness...
They're good for what they are. Instant fully trained badass warriors. As for how expensive they are? I dunno.
I almost conquered Perisno in my current playthrough, only Drahara and Bakhal Giants are left.
I still haven't broken the 6 million cash mark, however - probably because I pay over 100k in wages every week.
Keep in mind that not everyone wants to equip all their hired mercs and household guards with blunt weapons. I hate how those Long Gothic Maces look for instance, I prefer morningstars, holy maces, or swords - they just look cooler and more knightly.