When you're in a situation where you incur heavy charges for "selling your house and buying it back" (or selling it and buying the identical one next door) beyond the 5-10% you lose in transaction costs, you're basically going to stay put.
There are ways to avoid some of the downsides, but they involve additional risks many are not willing to take. The most common is to rent out the house you're living in (the "good location" one) and use the proceeds from the rental to both pay the mortgage and help with a new purchase elsewhere. Then you're effectively running arbitrage on your low rate loan.
I'm in that situation. We bought a starter home not knowing we'd get priced out of ever upgrading. If I knew then what I know now we would have bought the biggest house we could possible have gotten a mortgage on. But like you said the economy was shaky and we were afraid to overextend.
To upgrade would mean paying more than double what we pay now per month and starting a new 30 year mortgage in my 40's, which I'm just not going to do.
I think the comment you overheard is pretty typical - people are stuck in houses since if they sold and moved elsewhere their monthly payment would be double or more. People retiring and wanting to move from good job locations to cheaper retirement ones are not able to do so.