I don't see how latency would be a big problem for file storage. Home user file reads and writes are very spatially coherent, right? Keep the first N bytes of each file in a local cache, and when the user starts to read a file, you're pre-buffered. Note that this is just a cache; the whole file is still reliably stored at the remote site.

Users probably use the same small subset of files over and over again, too, so you don't even need to keep the head of all the files to eliminate most latency effects.