And here Mr. and Mrs. Moneypockets - we have a very nice home for a right price. Never mind that the neighbors' houses are worth a fraction of the asking price of our house.
Royalty among mere peasants!
Doesn't that typically mean that the houses around them will tend more towards lavish spending in a (possibly subconscious) attempt to keep up?
I would find it unlikely. The house would be more likely to be egged or vandalized.
Conventional real estate wisdom says that it's better to buy the cheapest house in a more expensive neighborhood. I suppose human psychology could be a factor, but there are two quantitative facts that jump out at me and explain the phenomenon well enough on their own.
(1) Property taxes are tied to home values, and
(2) Housing spending tends to be a function of income because of lending caps related to household income
The property tax base in richer areas is sufficient to support more spending on things like public schools, police, and road maintenance. As Billie Holiday famously sang: "them that's got, shall get." A person in an affluent area gets more police presence, better 911 response, better public schools, and more access to parks, public libraries, peace and quiet, sidewalks, and public transit. They get more bang for their tax buck than a person in a poorer part of the city. So, buying the cheapest house in such a neighborhood lets a family enjoy the benefits of what can only come from taxes and contributions from a more affluent community, without paying as much.
Because housing spending tends to at least partially reflect income (we Mustachians are statistical outliers), an expensive neighborhood tends to have occupants who can afford to spend more time and money on schools, local businesses, parent-teacher associations, civic clubs, and other things that improve the quality of life in the community. Living in such a neighborhood makes it possible to have your kids go to a high quality public school within easy walking distance. Yes, you will still have to pay extra fees if your kid plays the tuba in the marching band or is a cheerleader... but nowhere near as much as if he or she went to a have-not school. Your kid will also benefit from a many years' worth of investment by the band and athletic booster club.investment which purchased the rental instruments, the uniforms, the performance rights to hipper, newer music and an actual budget to hire assistant coaches and attend out of town performances or competition. Result: a better experience through the public school system, at a fraction of the price participation would have cost if you had to pay it all out of pocket.
The recipients of an "extreme home makeover" are generally left with the exact opposite of what conventional real estate buyers want: the most expensive home in a cheaper neighborhood. The things that reduce a neighborhoods desirability (crime, noise, lack of services, and crappy schools) are still present.