actually, i think it was my brother who told me that, and although your explanation/reasoning could be valid, his was a little different. people buying houses aren't always looking for the best deal, but they're looking for a place that they could call home. people are also suspicious. so if your house is the cheapest on the block, they'll be wondering, why is it so cheap? what's wrong with it?
it reminds me of a marketing story that larksun told me about a local dude who made snowboards. he used the best materials he knew of to make these awesome boards and he could do it for really cheap. so he sold it at a price that was roughly 50% cheaper than any other board, while he swore his quality was better. but no one bought them. he consulted a business guy who advised him to raise the price to be on par with the other good boards on the market and sure enough, they started selling.
people want a deal, but they don't want cheap. if it's too cheap they'll wonder why and not bother. i don't know how many times i bought the more expensive food at the store thinking that it'd taste better or something.
and for being the most expensive on the block, people would just think you're overpriced and tell you to screw yourself.