P.K.
I live in a house that's 888 square feet, as does my neighbor, who raised 7 children in it (back in the day...she's a young looking great-grandma now). Now granted that was a 3 bedroom house, but obviously tight quarters can be done. It really makes you evaluate what you "need" when you're in a small space.
I'd go for it. Look at it this way...even if your 2nd child is a girl, she can share a room with your son (or room in with you) for a couple years at least. By then the housing market should be better.
Is it ideal? No. But other than being a little tight on space, it's not going to hurt anyone. And, with your history, who knows how long it will take to get pregnant. You might end up having a baby just as you're moving into a new house anyway. As I'm sure you know, it only gets harder as you get older, so you might as well start trying now.
A friend once asked me what I was waiting for when I said we weren't ready to have children. She said, "If you're waiting until you have enough money, forget it. You'll never have enough. If you're waiting for everything on your to-do list to be done, that'll never happen either." Good advice, provided you at least have a roof over your head and an income of some sort ;-)