Many studies during any kind of economy in the pricey areas barely move up. Home prices are over valued in a declining market will not appreciate much as there is no room left. Regardless of the neighborhoods the difference is the time lagging phase. Normally when neighborhoods away from metropolitan area showed a steep up swing is the end of the boom. When good neighborhoods price drop that is the end of a recession.
that's the situation I'm in now. I personally like having 2 houses gives you more options
also as mentioned appreciation not guaranteed but rental income is pretty reliable
so you're covered for both cases if housing prices go down rents will probably go up.
It seems to me like you still need to do a lot more due diligence.
1. Smaller house on a big lot in best area: great potential to expand and bring it to the neighborhood average size and sell, although this requires work+determination+vision, not to mention extra $$$.
2. Your kids simultaneously benefit from best schools
If I had no kids, then perhaps I'd go with #2, just to hedge my bets and have higher liquidity.
Hope this helps.
Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors