Without knowing any of the details, it woult seem to me that each investment needs to be looked at separately. The loss is a loss when you sell it. The larger home is a potential gain if your assessment of its current undervalue is correct and that it will stay at the same value or increase in the future.
The neighborhood, your use and love of the larger house, commute costs, extra taxes, maybe more utilities for the bigger house, extra homeowner fees, mortgage insurance, extra hazard insurance are all additional factors.
You may be better off hanging on and waiting for current home to improve.
Take a look at all of the numbers which it sounds like you are already doing.
Don't rule out a foreclosure property. This is a great time to buy. As you probably know, the $8,000 tax credit has been re-instated for first timers or those that have not owned in three years. There is now a $6,500 Tax credit for existing homeowners. Additionally if you do purchase a foreclosure property, free grant money (up to 22% of the purchase price) is available if you live in the home for periods of 5, 10, or 15 years. This makes inexpensive homes already, even more affordable. The free grant money is available through the state of Arizona. See the link for "Free Grant Money" at: http://www.arizonahomesland.com/forbuyersorrenters.php
If I can answer any more questions or have one of our best agents show you some homes or land, feel free to give me a call. I would be pleased to help you.
Jeff Masich, RealtorÂ®
Arizona Homes and Land
HomeSmart Real Estate