Right now you are using 32bpp images, and then falling back to 16bpp for slower devices. Because PNG uses zip-style compression, pictures of houses won't compress that well, so your size on disk and size in memory will be similar.
PVRTC allows you to save at 4bpp or 2bpp, so you'll get sizes 8x or even 16x SMALLER than a full color image, both on disk and while loaded into memory (loading images are a major source of lag on iPhone, so a smaller on-disk footprint is always welcome). You can even zip compress it for further on-disk savings, though YMMV.
The quality degradation is similar to what you'll get in JPEG, in that there will be some artifacting depending on the quality of the encoder and the source image (hard edges don't compress well, nor does text, but photorealistic images retain a lot of quality).
The power-of-2 restriction is the only real pain point of PVRTC. But if you're making sprite sheets, that's probably not going to be a big issue for you anyway. Once it's in memory it's just a texture like any other, and you can use it sprite sheet style like you're already doing, chopping up the contents any way you choose.
I suggest you try cropping one of your house images to a square sized power-of-2 as a quick test and convert it to PVRTC so you can see for yourself what the quality is like. It may yet be usable for your purposes, and the potential payoff is huge.