This has been asked and discussed many times over the years as regards to basements but my situation is slightly different. My 1910 house was built out of concrete blocks (called rock face blocks that were cast to look like stone on the exterior face). These blocks form the foundation below the frost line (zone 4) and go straight up two floors and hold up the pyramid hip roof. No capillary break.

The house is balloon framed, with all (old wood) joists embedded in the block.

It has been gutted and I am building interior walls offset by as much as 8″ from the concrete – per building inspector, though they are not load bearing, they must land on top of floor joist. In other words, insulation will have a continuous path along all the walls.

So my question is obviously about insulation and vapor barriers. I was quoted over $25K for 2″ of closed cell foam on all the walls including the 5′ tall cellar (which will be encapsulated). It’s quite a bit over my budget. Cellar walls are parged and uneven – so I definitely see a need for ccSF there. But stories 1 and 2 are plaster-smooth with only a few rough spots where old chimneys used to be attached.

Can I attain the same level of insulation and air/vapor barrier with 2″ of EPS properly attached and sealed? Is this ever successfully done in above-ground applications (not basements)? The cost savings would be almost 50%, even if I also did flash and batt with mineral wool friction fitted in the new offset walls.

How would I handle the joists embedded in the block if I went with EPS?
What, if anything, would you recommend for sealing the exterior of the concrete block (EPS/slightly water permeable) or 2″ ssSF? 
Anything else I should be thinking about?? Many thanks for any advice