The first three years are the steepest part of the depreciation curve - that value is already gone. Now you are looking at ~$1,500/yr depreciation going forward. If you like the car, keep it for another 10 years and the incremental cost is not very much. It's reliable and you know the history on it and there's plenty of room for a second kid. The only Honda you are going to get for $10k is going to be +5 years older and have way more miles on it, so higher ongoing maintenance expenses.
If you just don't like the Highlander, then trade it in for something smaller. Personally, I could not fit in a Civic with two rear-facing car seats in it, so you may want to check that first.
Wait a second - no way. It's got horrible gas mileage and represents a horrible use of an extra ~$15-20k of capital that could otherwise be producing money. Viewed differently: Selling it for $29k and buying a $10k used Honda produces about $750/year SWR on the invested $19k that could be used to cover any differences in expenses -- and the gas difference alone will probably make up for it. 11k miles ~= 3600 miles/year. At 22mpg combined, that's $351/year ($2.11 avg us price / gallon) in gas, which would be cut by about $125/year moving to a 35-40mpg car.
OP - if you're expecting two, check whether the outback will be comfy with two car seats or not (my tiny Focus is not, alas, though it handles one). In another thread, someone suggested the Ford c-max hybrid, which I haven't looked into yet. The Outback may do just fine, in which case your small car idea sounds good.
(Or downsize to one car for a while. We did this recently and it's been wonderful. We probably spend an extra $200/year on Uber because of it, but that's far less than what the 2nd car cost us.)
