You both hit on the issue - you only come out with cash by moving to a less expensive location or a significantly smaller size home. Without that, increasing property values make us feel weathly, but really just mean taxes go up.
I do know people that have done ok by buying houses in poor condition (a foreclosure actually), fixing them up over the course of a year or two, then selling and buying another place in poor condition to repeat the process. You have to put a lot of your own time into this, and have generally increasing property values for this to work once you account for the cost of selling and buying.