Selling update

Well we got an offer February 14th and we accepted. Since then we have been through the inspection/appraisal process and started looking for a house to buy. Well everything was going along so great then we got the bad news last night. Our house appraised for $4,500 less then the offer amount. We were going to have to pay about $3,200 at closing anyways but this new development makes it over $7,000. We are at a total loss on what to do. We don't know what the right choice is and don't know who to go to for advice that won't have a biased opinion. Our fear is losing so much on a nice house and not being able to make it up on the buying end. I was prepared to pay some money out at closing but not that much. I know some people are having to pay a lot more than that at closing but I am assuming these people are in danger of losing their houses and have no choice but to sell to avoid foreclosure. We are not in any danger what so ever, I even put 140 extra on the principle every month. My husband wants to walk away and just stay put for now....but how long till the market improves and we can sell it for what we think its worth and not be dragged down by the foreclosures in the area. My concern is what if this is the best it will be for several years to come and we wait and lose just as much down the road. Do we jump ship now and take the loss hoping that we can get a good deal on the house we buy. We don't have to move, we are choosing to. He had said at one time that he didn't want to have kids in the house we are in because its too small. I tend to disagree but I see his point too. I don't want to put off kids just because of where we live. Plus he pointed out that I'm not pregnant yet even after being birth control free for over year but its not like we aren't trying. I'd love to be pregnant at this very moment, of course that is not the case, but am hopeful that it will happen soon (go to the doctor 3/31, will be discussing such issues then). I wish there was an easier way to make the decision and had more time to think. Do we stay put or lose the money and equity that we had built for the hopes that we made the right choice in selling at such a low amount. Need a sign or something please!!!