Does use of WEP only open the network to attacks in proximity of the router?
Yes. WEP is used for protecting the wireless communication between a device and your router. So the insecurity of WEP is limited only to device in "proximity" of the router.
I couldn't give a great answer for why it was necessary, given that we live in a suburban neighborhood with friendly neighbors
Even if your neighbors are great and not a threat, there are threats from outside your neighborhood. Access to your network doesn't just mean free Internet for the attacker. They can potentially gather information about you or your family from other devices connected to your network.
It is fairly easy and common for individuals to use wireless from their car/vehicle if they can get easy access (i.e. WEP) for free Internet access. If they have more nefarious purposes in mind, this can easily be used for other purposes such as identity theft.
This article was a fun read even if the practical implications it could have by a smart criminal on an individual with weak network security could be a bit scary.
given that we live in a suburban neighborhood with friendly neighbors
Sounds very similar to what neighbors thought before police arrested this killer, this kidnapper, or this child pornographer. And these are by no means isolated incidents as there are literally hundreds of these stories in the past few decades alone.
Yet spending a bit more effort on basic wireless security can help prevent you from finding yourself the center of a news story such as this man or this couple.
(probably only two families within connection distance of our router, and a poor connection at that)
This circles us back to "proximity" and what does it actually mean. Your typical 802.11 WiFi device with it's omnidirectional antennas will only give you a range of 200-300 feet.
But with the use of directional antennas, device can connect from much further away (as much as a quarter or half a mile in ideal circumstances). This likely opens up many more locations from which someone could connect to your wireless. One of the articles I referenced is an example of someone hijacking the connection from their boat in the middle of a marina to the router on the 12th floor of the victims building, much further than your typical expected connection distance.