Family First Financial Planning
My first thought is to get a professional organizer and see if they can't make do with the space. I have used one quite a bit and she really has made me see that my house can really hold our family of six and all their belongings once you pare down all that extra junk!
They could buy a new home and try to rent the condo, but they would have to recognize what their rental income would be versus the cost/hassle of renting. (It could result in a negative cash flow for a period of time.)
(Editor's note: This is not an option for John and Sandy because of homeowners' association restrictions.)
They could sell the home and accept the loss and hope that they make it up in the long run on their new home. They should ask themselves: What are the benefits financially as well as emotionally of doing so?
Note that a larger home not only costs more to buy but also costs more to run and manage. Have they considered what the additional monthly expenses will be with a larger home? Add yard work, pool maintenance, etc. Plus a new home means new furniture, new decorating, etc.
I would rather keep my overhead low and wait for the market to correct itself. A family of three can live in a two-bedroom condo just fine. Plus they can use the extra money to save more for retirement, college, family vacations, etc. They can just walk away from the condo for a long trip without those worries about grass cutting, home maintenance, etc.
It comes down to wants versus needs to me. The most successful people are the ones who keep overhead to a minimum. Debt enslaves the borrower. If they stay put, they can pay off their debt quicker, save more, and then in that situation have more choices in life later on. I have seen too many people feel they must have that bigger house and then get way too deep in debt. Plus housework, yard work, cleaning, etc., takes time away from family.