Interesting question Dave. I'm in the middle of trying to come up with a track plan for the limited space I have available in my small house. I'm sticking with HO but I will say I have considered N scale. I've built a few N scale structures for JMancuso and he has them on the beautiful N scale layout he's working on. I must say I'm tempted by some of the things I see him able to do in a relatively small space.
There's lots of pro's and con's for both scales to consider. Personally, I elected to stay with HO because of what I already have invested in it, the quality of the sound that's available these days in HO and, finally, the fact that my eyes aren't getting any better with age. N certainly does offer more possbilities in a limited space though. Especially if you don't want a small layout to seem like there's no distance between towns/stops.
Good luck making a decision. This should be an interesting discussion.