Altering a client to relay connections (proxy or SOCKS) is not a problem .
But somehow the clients have to find eachother on the LAN .
Once the clients knows the location of their neighbours the rest can be worked out with several solutions .

On the net it is just thesame problem :
Why do you think we have hostcaches ?
But on the net we atleast have the hostcaches .
They always stay in the same place so the clients know how to find other clients .

But on a home-LAN you have computers jumping on and off al the time .
So you have to have a dynamic solution wich doesn't require dedicated hardware . (meaning : a hostcache)

How do you find eachother on a LAN ?
There is no handy-dandy always-on hostcache on a LAN .
Do you think that our example family will dedicate a PC just to run a hostcache ?

Just thesame with the proxy : Do you think that the average user will dedicate a computer just for a proxy ? I don't think so .

Setting up a proxy on the router ?
Then we again bump into the average user group .
1)The average user doesn't have a comp as a router .
2)The average user doesn't know how to set-up a comp as a router
When you use the term "router" in the average user group you have to think those cheap POS they pick up at RadioShack .

So they can't fiddle with their routers like they want since the thing doesn't support it .
(Unless you find the time to write new firmware for every router on the market)