It's a first-world problem, but as you say, it's still a problem. Unless you're okay with taking the loss, or just moving somewhere far away because the market decided that this area has now become too expensive to allow existing homeowners to downsize.
In your case, you can a) stay where you are or b) sell the house, pay the tax, and buy a similar house (or a cheaper one elsewhere).
An alternative you that didn't buy that house at that time, and got lower after-tax returns on that money, doesn't have option a) and has less capital available for option b).
Everyone else is in an strictly worse position than owners.
You have an unrealized capital gain and an unrealized tax liablity. Selling the house you'll realize both. You "feel" that you are not realizing the capital gain if you buy a similar house with that money. It's understandable, nobody likes paying taxes. But if you were to sell the new house in the future (maybe to downsize) the transaction would be tax free if prices don't change.
And as I said already, if you think prices may go down it's rational that you avoid realizing the capital gain and the tax liability at the current level if the utility gain from moving to a "similar" house is not larger than the expected savings of realizing (maybe) a lower capital gain in the future and paying less taxes.
You're right. I retract that. (Unfortunately, it's too late for me to go back and edit the original comment.)
Let me rephrase: rising prices are not always an unalloyed good even for home owners.
Either one.
We put a certain intrinsic value on a local lateral move. If the cost of moving is less than that intrinsic value, and we find a house we like, we'll move. If the cost of moving is more than that intrinsic value we'll stay regardless of whether we find a house we like. So the higher prices go, the less likely we are to move. So when prices go up, that removes liquidity from the market, which perversely drives prices up even further and makes the problem worse. So while we're sitting on a pile of equity, we can't actually use it unless we move out of the area, and that has a huge negative intrinsic value for us. We really like it here.