Cameron and Julie,
Thank you for your answers! I really do appreciate the back and forth here, and in fact would much rather hear people tell me what I don't want to hear than what I want to hear. I'm perfectly capable of telling myself what I want to hear!
CP, allow me to address your point about the complexity of the market. Of course every market is dynamic and complex, but it is naive to assume that today I am paying the same price for a home that I would have paid for the same home 2-3 years ago. This information is readily available to the public (at least in Minneapolis and St Paul), and no homes of the dozens that I have checked out are selling for what they actually sold for in 2004 or 2005. The rare exceptions would be homes that have made capital improvements.
What I perceive from that is that many (most?) of us who bought in that time period paid more than we would have now for that property. Certainly that is true of where I currently live, and where I would potentially move. What I also think that means for me is that although I will be taking a loss on my current home, I can also purchase a more desirable home for less than I would have back in 2004 or 2005. In fact, in looking at what currently listed homes sold for in that time frame, I know for a fact that this is true.
I also know that my wife and I have a lot of disposable income right now that we spend away needlessly. Our options are either to put a significant % of our incomes into retirement funds or to purchase a more expensive home. Clearly there are tax implications to both, but we are also growing our family and so that adds non-economic concerns as well.
My question was more about what my options are right now, and what the opinions of real estate pros would be.