It’s hard to choose the Number One Tragedy (problem, really) facing the Frum world.
I agree that you have identified one of the biggest problems, but I think you’re just a bit off.
The problem is not that so many people live near each other. It is that so many people are so weak that they can not help but be overcome with jealousy and the like when they see their neighbors’ lifestyles.
For too long, we have been telling ourselves (in the form of speeches at dinners and conventions, in the form of books and Shabbos Derashos, and in so many other ways) that we are wonderful.
Don’t get me wrong; I do not mean to dismiss all we’ve accomplished. Of course, there are great people, and of course there are regular people who do great things.
However, generally, we have grown increasingly petty, materialistic, self-centered, and self-absorbed. As a community, we have not worked to develop proper character in each of our individual members.
The solution is not decentralization. This will only replace the current set of symptoms with another. The solution is to admit to ourselves that we need to be held to a higher standard of character, and then to embark on a campaign to develop that character.
The character traits mentioned above are expected in my Elementary School students, but should not last to adulthood. We need to grow up.