I have been playing with this for a while now, and commented on it in a post back on January 10th, that I was also having issues with this. From what I now have read, and tested, this is now the 'behavior' of file explorer. It was introduced with Windows 11 build 22593. This is where Microsoft renamed the 'Quick Access' of file explorer to 'Home', and made Home the default where file explorer opens. I also found that 'Home' is not an actual location, meaning, you cannot create anything new at this location as it is a virtual folder.
What is disturbing is that for the 'Expand to Open Folder' to work, you have to go into the options and set the 'Open File Explorer to:' the 'This PC' option. However, when you do that, File Explorer opens at the root of the machine, and for most people it appears they want to see what is in their 'user directory', or what people refer to as thier home directory. So, the terminology is a bit confusing.
What I have found is a quick workaround to this... or maybe something that will work for this chapter of File Explorer and going forward a bit. The issue is navigating into the folders shown in the 'Home' directory, as they are virtual and do not behave with the 'Expand to Open Folder' option. This, IMHO, is what people were expecting.
The solution is to keep the 'Expand to Open Folder' option checked (keep it on), then create a shortcut. I've now created a few on my desktop to take me into specific folders within my account's file structure. When you create a shortcut, it asks you to type the location of the item. What I type into the box is: "explorer c:\Users\kernh" (kernh being me). When you look at the properties of this new shortcut, it will actually show: "C:\Windows\explorer.exe c:\Users\kernh". Now, when you use this new shortcut, you will see that the window that opens shows you are at the "Home" location, and it also shows you all the files and folders in that shortcut directory. You can then set the 'view' of that folder however you like, with 'list', 'icons', or your choosing. Also, you'll be able to create new files or folders within the directory that opens. Then when you navigate into any of your directories that show here (double click on a directory), you'll now see that the "Expand to Open Folder" actually is working, and that directory will be listed in a tree in the left-hand pane.
BTW, you can also put this shortcut onto the TaskBar, however, you can't pin to Quick Access, as that puts it on the TaskBar shorcut that doesn't behave with the 'Expand..." option. The thing with this new behavior is that Microsoft has no documentation that actually describes this new behavior.
As usual, I am open to comments. Thanks!