The economic principle of “Progression and Regression” applies to home values and defines the affect a home has on the value of other homes within the same neighborhood, and vice versa, that is the affect neighboring homes have on other homes within the community.
The theory states that building a home that is valued substantially above other properties in the same neighborhood will cause the newly built home to value downward toward the other properties. This is sometimes called “overbuilding” or “overimproving” as frequently homeowners will put additions or improvements on a home that are substantially superior to their neighbors thus pricing themselves out of the value range supported by the rest of the homes in the community.
But the theory is called progression and regression because a home that is in a diminished condition, in a better neighborhood, will command a higher value. Additionally it is possible for a neighborhood to reach a tipping point. In other words, if enough of your neighbors “overbuild” your house could increase in value due to the increase in value of the neighborhood.
As a rule of thumb, you should focus on the neighborhood as much as the home itself. You are always better off, and will always receive a better return on your investment buying a home that is on the lower end of the value range in the best neighborhood you can afford (that is a neighborhood consisting of superior more expensive homes), as opposed to buying the most expensive home in the least expensive neighborhood (a neighborhood consisting of inferior less expensive homes).