I dont think so because they were able to live in the property while it gained value, so they didn't need to spend on other accommodations. Alternative living costs would factor in towards the decision to sell and what they can get with that value today, but im not seeing how it reduces the earnings.

You would need to subtract the YOY property taxes and maintenence costs (with inflation) to get actual net earnings, though

What is the point of unrealized gains if you can never realize them (spend them)?

One use case is being able to borrow more against the increased value, but I do not think that it is a good idea for 99% of people to use their primary residence as leverage.