If you have no plans to sell then the resale value doesn't figure into it unless you consider the 'of mice and men' problem... which it might make sense to do. Are you thinking of expanding because you need the space, or because you imagine it will improve the resale value? If the former, then for how much of that indefinite stay do you expect to need a 4br house? If the latter, are the $2m houses, besides being larger, also newer? When did they sell for that price -- before the bubble, during or after?

Other important considerations:

(1) How much of the $1.1 million value is equity, and how much is mortgaged?

(2) How would you be paying for the new construction -- loan or out of pocket? (If by loan, I would seriously reconsider doing anything so drastic right now.)

(3) Is your home charming? Does it have character or just blech? Charm can go a long way to making a home saleable

(4)What will doing a tear down and new construction home do to your property taxes? In my part of California, a complete tear down (as opposed to remodel of an existing structure) will result in a supplemental tax and then a permanently higher tax assessment based on "new home" value, but a remodel will not.

(5) Would a new home look out of place in your older neighborhood?

(6) Would you be expanding up or out? (If expanding would cause you to lose too much of your yard, it won't necessarily help your resale -- people who buy those older homes on big lots are often young families looking for a house with a yard for kids to play in.)

(7) If expanding up, what are the single-family residential height restrictions in your area? Will your new house interfere with views that have been long enjoyed by your neighbors/friends (will rebuilding cause a rift in your neighborhood circle -- this can be devastating and really ruin the enjoyment).

Just a few things to ponder.

Do you need or want a larger house?

What is the value of your land alone (without the house)?

Where would you live after the teardown?

If you are not in California with its weird RE tax laws (and I suspect some pretty weirdly remodeled houses because of the tax advantages), and you want a larger house, the teardown is the way I would go. We tore down a 1950's ranch on an acre and built new. Every day I thank our next door neighbor (an appraiser) for his advice not to remodel.

I agree with everything sarschlos_remodeler said. If your house has architectural character and is in good shape, I wouldn't tear down. But if living there is a daily nightmare of problems, I'd definitely do it.

In some jurisdictions a tear down is followed by a new build with a lengthy detour through the Planning/Zoning Dept.. Remodeling is a much milder ordeal often only requiring a building permit. Thus the house is not completely torn down. In the jurisdiction where I last lived saving the footing and two load bearing walls meant it was still a remodel.

The land value vs. the improvements play a big part.

If the land value is very large tear downs become attractive.

I would talk with a few architects and get an idea of what could be done with a remodel. You'll spend much less money adding 800 square feet than rebuilding a whole house, not to mention the time and hassle. Unless the architecture is horrible, a remodel would be a better route.

"Unless the architecture is horrible, a remodel would be a better route."

That is not necessarily true. The architectural design of our 1964 house is clever and not horrible, but I'm not convinced that it wouldn't be cheaper to rebuild than remodel (except for that nagging tax issue) because the house NEEDS just about everything: insulation, doors, electrical, windows, chimney, fireplace, kitchen, bath, floors, baseboards, door and window casings, drywall, stairs, ductwork. Retrofitting all of this + tying a new section of the house into the old (including roof issues) may be more expensive than builidng from scratch, where the contractors will not have to find ways to work around the quirks of an existing building.

Bottom line to me is:

What will be the market value of your partly-new/partly-old house if you remodel? (You will not recoup the cost of the addition within a short time.)

What will be the market value of an all new house the same size?

Yes, the addition means less outlay of cash, but it doesn't increase the value of your property dollar for dollar.