FWIW, I do not think you are mentally unsound, nor is it at all unreasonable to be fed up after years in a basement (with cockroaches!). I think you are experiencing the very natural frustration of having worked very hard towards a goal for many years -- including sucking up some less-than-ideal circumstances -- and are now faced with the fear that even all of that may still not have been enough and you may never get what you really really want. And it's not fair and it's depressing and it's generally horrible.* Totally, totally natural.
I also think you've made the right call to step back for a bit. When you are that wound up, that frustrated, you begin to make bad decisions.
So, first: your friends are NOT doing better than you. They are just living in their net worth, while yours is living in happy little investment accounts, procreating like rabbits. They have bling, sure, and bling is very, very tempting -- especially to those that don't have it. That's why bling exists, after all: to convince others that you are better than them. But you have substance and character and the ability to delay gratification in favor of a long-term goal. This is what will make you happy in the long-run, not a house.
Second: it is eminently reasonable for you guys to decide you are no longer willing to live in a roach-infested hovel for another X years. So take a look at your plan with fresh eyes. What alternatives do you have right now, in the real world, that would remove some of the annoyances and frustrations? A larger apartment, maybe above-ground, with lots of windows and light, and better closets? What do those run? Maybe someone nearby has a townhouse or house that you can rent for a year or so, so you can get a little more space and have the feel of living in a home with a yard and such? See what you can do short-term to decrease your frustration level and buy you a little bit of contentment, at a reasonable price.
And/or: play the "the grass is NOT greener" game. Honestly, this is what I do when I get fed up with stuff. Imagine yourself in the big house. Now imagine yourself writing the mortgage payment. Imagine maintaining it every weekend -- what fun weekend activity do you give up, now that you have to commit more time to mowing the yard and cleaning the house? And, whoops, the HVAC system just went out -- gotta get a service guy out, there's another $250.** Now, go look at your budget: what fun stuff and/or savings do you cut back to cover the cost of all that extra mortgage, utilities, maintenance, etc.? Mentally imagine yourself on a Saturday night, choosing not to go out on date night, because you are now living in that money; or imagine yourself at work at the age of [current RE target + X years], because you need so much bigger of a 'stache to support those higher expenses long-term. Etc. etc. etc. I call this the "even George Clooney probably throws his socks on the floor" version of mental imagery -- the point is to take a realistic look at your fantasy and see how reality compares to what you have now. Generally, this reminds me that I'm in a pretty good spot. But if you find you're still dissatisfied with your current choices, then go back up a paragraph and figure what version of extra money out and extra amenities gets you to a new happy medium.
And good luck.
* FWIW, we had multiple miscarriages and infertility treatments, which led to a very similar degree of frustration and depression and worry that we'd never get there.
**I cannot tell you how many times this has happened to us -- always on the first REALLY cold day of the year.