I was in the same boat about 11 years ago, my 1300 sq ft 3/2 was fine for a young couple when I bought it in 1991 but after having two babies it was cramped. The contractors were dying for work in 1996 so I had some great quotes at about cost and I had a big lot. Having purchased in 1991 I was upside down so I couldn’t sell even though my income had doubled and I could have afforded to move up if the market had been cooperative. The problem was exactly what the others mentioned, room additions would have made the floor plan choppy, the stress of contractors in the home and the delicate nap/sleeping schedules of a 1 and 3 year old would have required a family size bottle of valium to survive construction and it would have limited my ability to be in a financial position to move up when the market changed.
What I did was stick it out for another two years, just as the market returned to 1991 prices (1998) I sold my house for what was owed including sales costs but forfeited my down payment, bought another house exactly twice as big in a better area for 50k more, almost what the addition would have cost.
