If you can rent a home that you like for $3000 a month, you would be batshit insane to buy one for $1.2 million. If you get up over $4k in rent it starts to be a wash depending on your assumptions about investment returns. Check out the NYT buy vs. rent calculator, it's fun.
To the original question: sell your place. It's a terrible rental. If you expect lots of appreciation in the next couple of years, you could make an argument for holding onto it, but I don't know anything about your market. It sounds like the new inventory will keep any big appreciation from happening, in your judgement, so that would be a reason to just sell the place now, rent a place indefinitely and buy if you find something you like and that makes sense.
Really, though, this decision should be made in the context of your future financial goals and situation. You guys have a money volcano. You are spending most of it on housing and childcare. If you want to quit forever, assuming you have *some* other investments, you probably can, you just have to leave NYC/SF/whatever HCOL place you are.
-W