Fortunately they do have equity in the house so they have options. But damn. That's an expensive dream.
Eh, you pointed out options ... they knew the cost, and they made their choice. It's not the choice I'd have made, but I hope they're happy with their decision. At the very least, they always have the option to sell the house ... they're better off than people who've overspent on vacations, clothes, or meals out, costs which cannot be recouped.
I frequently read another board that has to do with building custom houses, and I am amazed at what people choose: Yes, my children all need a large bedroom with walk-in closet and a private bathroom. Yes, we need a living room + sunroom + office + rec room + a man cave + a craft room + a 200 sf walk-in closet + a laundry room with granite countertops. No, 4500 sf isn't all that big. No, we could never "downsize" to a three-car garage; it'd hurt us on resale.
I frequently feel like the poor country mouse when I'm reading that board -- not that I actually care that strangers think I'm "under-building" -- but the irony is that I can pay cash for what I plan to build, whereas a frequent topic on that board is, "My plans came back from the architect, and we must cut the size by 1000 sf and the budget by 20%. How can we do this, given that we aren't willing to give up anything?"
Best part is - that "Dream House" is most likely unlivable for them once they develop mobility issues. Very few people's dream house is going to include only one level, layouts that work for walkers/wheelchairs, grab bars, and so on.
Building a "dream home" is one of my retirement goals ... but I don't interpret "dream home" to mean "big, expensive, luxury home". I'm planning for something in the 1900 sf range ... and one of the big reasons we're planning to build is so we'll have a place designed for "aging in place"; that is, we're planning on space for walkers, grab bars in a no-barrier walk-in shower, a garage entry with no steps, washer/dryer adjacent to the master bedroom, etc. Everything we'll need will be on the first floor, and the upstairs will contain a second master bedroom for one of our adult children /grandchildren or a paid caretaker. Most of our finishes will be nice-but-not-luxury-priced; for example, we plan to go with a metal roof that'll probably never need replacing; we want all-tile bathrooms instead of cheap stuff, but we're fine with basic tile from Lowes; we'll go with a standard-sized tub without whirpool bells-and-whistles.
We anticipate this will cost us about $50,000 out of savings + the sale of our current house. So, a "dream house" doesn't have to be an unattainable goal.