It's a good idea, the best instanced idea yet, but the people who love this game for housing want neighborhoods. Every other MMO in existence has instanced housing; There's only two I know of that have had neighborhoods.

That being said, there is not enough space to do this assuming people could buy whatever size house they wanted. The demand for larges, on my server, is double the demand for mediums. A ton of people would have larges and there would be no open neighborhood to randomly spawn their large into. It would be like the problem of adding a lot more wards. People will instantly buy the larges and maybe mediums but all of the smalls would be completely empty.