First of all, in certain parts of the country, a million dollars doesn't buy you a mansion, it buys you a modest cottage. Look at the real estate listings for Alameda, CA, for instance.

Secondly, I suggest you talk to your wife and ask her what she wants. You are wise to avoid the "bigger is better" mindset. A big house and lots of possessions never brings lasting happiness. Once you get used to the novelty, the weight of expenses and obligations to maintain an upscale property will may you regret it, but once you go there, it's difficult to go back.

Your wife may be trying to fill a hole she feels exists in her life. Her interest in pricey real estate indicates to me that she's suffering from a case of "if only..." If only we had this, if only we lived there, everything would be fine. This may indicate that everything is not fine in your marriage, but only by talking it out with her can you figure that out.