We're living in a 1200 square foot home with two children and another on the way. Sure, we'd like more space (and I'm sure we'll feel it even more once we've brought the baby home!) but it just isn't in the cards right now. What we did instead was make it more liveable for us. We did lots of reorganizing and decluttering; lots and lots of storage so that everything has a place and we don't feel so closed in. My husband is from the UK, where smaller homes are the norm; he lived his whole life, until coming to America at age 25, with his parents & sister in a 1000 square foot home with one bathroom; his bedroom was the size of a walk-in closet, no kidding.
Maybe y'all can find some ways to get more comfortable with the space you do have & wait out the horrible market. I know it sucks to feel like you JUST NEED SOME FREAKIN SPACE but you do what you gotta do, right?
Best of luck in making your decision!