When applying master pages and page layouts using CSOM, should we generally operate using .html files? What would be pros and cons of using .html vs .aspx and .master files?
The advantage of using .html files is that "ordinary" web designers can modify the non-SharePoint specific parts of the master page/page layout in their tool of choice.
The advantage of using .aspx and .master is that SharePoint designers can directly modify the master page/page layout without having to worry about how the conversion from .html to .aspx/.master works.
The most important thing to remember is never to modify a .aspx/.master file which has a corresponding .html file as the changes will be overwritten if anyone later changes the .html file.