Thank you all so much for sharing your thoughts. You all made great points and told me things that I didn't exactly want, but needed, to hear. As such, I needed a few days to process before responding.
To answer the question of how we got to this point with our incomes, the current incomes are relatively new. Up until January 2013 I held a series of jobs making from 33-35k. I did my undergrad part time and didn't join the full time workforce until 2006, leaving less time to save. I increased to 40k for a year, and just started my current job of 52k four months ago. My husband took his job 4 years ago and was hired in at 38k and gone up from there. We absolutely could have saved more, but did not rack up any credit card debt and actually don't spend much money on random crap. Again, I think eating/drinking out is our real Achilles heal, plus several times a year visits to our respective out-of-state families, and paying my husband's way through community college.
Also, I've known plenty of people with graduate degrees who made significantly less than me, or couldn't find a job at all. This seems like the nature of the current job market where work experience has such a high premium placed on it vs. schooling. The MA will help me in the long run, for sure, but I have to pay my dues for a few years. Meanwhile, my husband is in IT, and the BA he's working on will only secure the type of job he has now, not qualify him for a better one.
Our decisions really come down to choosing between more time with kids and the convenience/security of my continuing to work. MrsPete, I absolutely hear you on the nature of the workforce in your 40s-50s. If I was going to choose between raising kids and my current job, I would stay home, but my current job is a fantastic stepping stone to something that I will enjoy more and pays better. I don't want to miss out on time with our kids, but in the long run I don't think I'll want to miss out on that opportunity, either.
As for everyone's specific suggestions, I can definitely see tightening our belts a LOT and selling one car. Adding freelance work now doesn't seem like a good option since I have an anxiety problem and have a tendency to shut down or have panic attacks if I don't get any downtime. Buying the size house we're looking at is a lifestyle choice, not a necessity. We don't want to buy a starter home and then have to move in a few years, so we're buying a big enough house for us and two kids now. This way, we don't have to worry about selling if the market goes down, and we can invest in it and enjoy the changes that we made. A house near husband's work would be significantly more expensive (50-100k more) than our current location, and rentals in a decent neighborhood and of a decent size in this area could easily top 1k per month. Renting a house would most likely be 1.2k or more, and are difficult to find.
All this is to say that I think being a SAHM, at least at first, is not realistic given our other choices. I'm sad about that, but definitely needed to hear it. Again, thanks to everyone for the responses!