Many of your categories look like they could be cut some. You're spending almost $100k/year. Most families don't even have that option, so clearly there's some room to cut.
Groceries: $750/month is high. That's over $2/person/meal. See
this MMM post for some ideas for how to reduce this cost. The key is to use inexpensive base ingredients for most of your caloric requirements, and use reasonable quantities of more expensive ingredients to keep the meals interesting.
Gas: $238/month. With gas at about $3.75/gal, that's about 63 gallons of gas per month. If you drive a car that gets 30 MPG, that's about 1,900 miles per month, or over 22,800 miles per year. That's a lot! If you have a less fuel-efficient car than this, sell it now and buy a more reasonable automobile. Then look for ways to reduce your driving, such as by walking, biking, or taking public transit. Portland has a pretty nice transit system, you should try using it sometimes. If a lot of this driving is to and from work, look into moving closer to the office.
Auto insurance: $100/month is on the high side. We pay about $25/month, but that's only for a single car. Look into increasing your deductibles and eliminating unnecessary coverage, and getting quotes from competing companies.
Gym: $91/month is expensive. Try cutting this expense entirely and switching to less expensive forms of exercise (such as biking, running, buying a set of weights for the basement, etc.).
Mortgage: Sell one of your houses. The rental income isn't enough to be worth holding on to a second house. You would probably not free up a significant amount of cash by doing this since you owe about as much as the house is worth, but cutting $300/month out of your expenses (or $1000 if you decide the smaller house is big enough for you after all) is a big win.
Utilities: these seem high. For comparison, my average monthly utility bill (for a small house in Seattle) is the following:
Internet: $50
Water/sewer: $55
Garbage: $20
Electricity: $25
Natural gas: $45 (mostly in the winter for heat)
My cell phone (T-Mobile pay-as-you-go): $5
Wife's cell phone (Virgin Mobile): $25
All told, this is about $225/month, just a little more than you pay in a week for utilities. Find out where your utility dollars are going. Save where you can. Use less electricity, turn the thermostat down in the winter, find a lower-cost cell phone provider, see if you can downsize your trash service, etc. There's lots of room for improvement here.
Haircuts: there looks to be room for improvement here as well. Though I haven't gone full Mustachian and started giving myself buzz cuts, I still only spend about $20 every two months on a haircut from a local barber. My wife spends even less than this, going to Great Clips to have them chop off a foot of hair when it gets too long.
I haven't addressed child care yet. Your current job pays you more than job-related expenses (child care, commuting costs, occasional lunches out, etc.), so you may not see a financial benefit to quitting work. However, you do say that having two full-time jobs in the family is causing undue stress, and that your dream is to do freelance writing. If you cut some of the expenses above, you could probably afford to give that a try! This is especially true if you think you could drop the daycare expense when you start freelancing.
This sounds like a lot, and it is. That's fine. Take things one step at a time, and you'll be saving lots in no time!