Thanks for the photos; they help a lot.
You have a problem. Your antenna will not be in the clear. The neighbor's house will block the direct signals.
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The antenna could also go in the corner up on the hill, but not sure due to WAF.
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The antenna needs to be located where the signals are strongest, not where your wife wants it.
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Do I need to be above the neighbors house?
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Yes, for best results.
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And what angle would be best to align the antenna to?
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Your signal report says 132 to 161 degrees magnetic. If your antenna was in the clear, I would favor more to 132, but since it isn't, the signals will come around the other houses in a way that is difficult to predict. I suggest you mount it in a temporary way without drilling holes to see what you can get.
The alternate location viewpoint looks a little more promising.