I believe we are physical creatures, and we need physical signs to be assured of the invisible grace that God gives us. It was a big leap for me to think of God actually giving us a physical church, because that was so contrary to what I had been taught. But then I asked myself...what's so bad about a physical Church? And doesn't it, after all, make sense? Christ didn't come down as a spirit, He came in the flesh. He didn't just speak miracles into existence, He used physical signs to do them - the clay on the eyes to heal blindness, dipping in the river 7 times, etc. This is why we are born "of water and the spirit," the physical and the spiritual. This theme of physical accompanying the spiritual is everywhere throughout the Bible, it is all over the place, and it makes sense as we are both physical and spiritual creatures.
I think what happens is that in the Old Law, everything is very much focused on physical, which makes sense because that's easier to grasp, and over time God led His people to come to understand Him more and more. When Christ comes, he explains there's a spiritual side to things as well...and that not only is adultery a sin, but contemplating adultery in your mind is a sin as well. (So, it goes beyond just physical actions, now, thoughts and intentions matter as well, invisible things.) But that doesn't mean He did away with the physical aspect of things, He just explained that, as C.S. Lewis talks about, the "real" world is actually the spiritual eternal world, and so we have to keep that in mind, and make that our priority, and the physical part will follow, but also our physical actions will help lead us. But the physical part matters, because we are physical beings. That's why, while it's not the water itself that saves us at baptism, we NEED to actually physically be baptized with water, because that's how we, physical creatures that we are, know that God has baptized us once and for all, because He promised to pour His spirit on us when someone poured water on us in the name of the Father, Son, and Holy Spirit. To expect Him to "baptize us" without that physical part is a bit presumptious, I think...and it's also easy then for anyone to accuse anyone else of not really being baptized...after all, there's no proof since it wasn't in any way physical, if that's what one believes. We NEED the physical!! That's why we have a physical piece of Christ with us in the Eucharist, which brings us invisible grace. Without it we wouldn't know whether Christ was really in us or not, we are physical beings, we need physical signs.
I say all this because I really struggled with it, and when I realized our need for the physical...I realized how much sense it made that Christ would then give us a physical Church, contrary to what I had been taught, and a physical head of the Church on earth, since He couldn't be there Himself. And the mumbo-jumbo superstitious looking things Catholics did suddenly made sense...they cross themselves and genuflect because this is physical worship with their body, they have all these sacraments that show an outward physical sign of an inward spiritual grace. How many times did I pray for forgiveness, only to sit around wondering later...did I really get forgiveness? Was I sorry enough? Confession was SUCH a relief, because for the first time ever I had a PHYSICAL sign that my sins were forgiven, there was no question. The ASSURANCE of God's grace that I had because of the physical aspect of the sacrament was overwhelming. I had longed for that for so, so long without even realizing it.
And that's the problem I had at first...how could God expect us to flounder around and find the truth if things were so ambiguous and intangeble, when He made us physical beings?? I mean, we need touch and taste and all those things...how sure would we be of our husband's love for us if he never touched us, but only told us? Why do we need a marriage ceremony and wedding rings in the first place? Because we need a physical sign of that commitment we're making to be assured of it and to show to the physical world that we did, indeed, make this invisible commitment to each other! And so, with all the things in our world working this way, through physical signs and objects, why would the Church, why would God's truth be any different? Why, of all things, would the one most important thing, the Church, the guardian of truth, be an ambiguous and intangible invisible thing that none of us can be sure of. It just makes so much more sense that God would give us physical beings a physical Church, and that this Church would be the physical representation and tool through which all truth comes, so that this truth can become physical as well (in writing, through the sacraments, etc), just as Christ Himself became physical for us, and we can be completely sure of what God wants of us, instead of wondering whether or not we have it right.
I think the problem is that the grace-centered folks go from the idea that it's not the physical part that actually saves us, which is TRUE!!! to the idea that therefore, we don't need the physical part at all, and that's where I think they go wrong, because God gave us that physical part for a reason. The thing is, the physical part is not to save us, it's to give us assurance that THROUGH this physical sign, God has sent His grace upon us, not because He's not ABLE to without the physical, but simply because this is how He told us He would do it. Without the physical, it would be a guessing game and it would all be based on "feelings." But feelings are fleeting and immaterial. God knows us, and knows we need physical signs as physical creatures.
Now, I do think the CoC takes it a bit too far...like saying someone on their way to be baptized will be lost if they died, because the act hasn't been done yet. But that's putting God in a box and limiting His power as well as His Mercy. God is greater than that, and that's why we Catholics believe in a "baptism of desire," wherein if one dies, but was not able to be baptized before He died, but wanted to and was planning on it, we don't believe that person would be lost because he didn't get the water poured on Him yet. So we believe there are exceptions, but the normative way to receive the baptismal grace is to actually be baptized, because that's what God said to do, and He said that because we are physical beings who need physical signs of His invisible grace.