Luther was wrong about many things.
Not this one.
Luther was wrong on many things, but that particular quote is not too far off - particularly in context. It came in a sermon where he said, in essence, that the Catholic Church had gone astray.
“Today the pope and his crowd cry out against us that they are the church, since they have received Baptism, the Sacrament, and Holy Writ from the apostles and are their successors. They say: “Where else should God’s people be than where His name is praised, and where the successors and heirs of His apostles are to be found? Surely the Turks, the Tartars, and the heathen cannot be His people. Therefore we must be His people; otherwise it will be altogether impossible to find a people of God on earth. Consequently, he who rebels against us resists the Christian Church and Christ Himself.”” [LW 24:303].
And
“Yes, we ourselves find it difficult to refute it, especially since we concede—as we must—that so much of what they say is true: that the papacy has God’s Word and the office of the apostles, and that we have received Holy Scripture, Baptism, the Sacrament, and the pulpit from them. What would we know of these if it were not for them? Therefore faith, the Christian Church, Christ, and the Holy Spirit must also be found among them. What business have I, then, to preach against them as a pupil preaching against his teachers? Then there come rushing into my heart thoughts like these: “Now I see that I am in error. Oh, if only I had never started this and had never preached a word! For who dares oppose the church, of which we confess in the Creed: I believe in a holy Christian Church, etc.? Now I find this church in the papacy too. It follows, therefore, that if I condemn this church, I am excommunicated, rejected, and damned by God and all the saints.” [LW 24:304].
and he goes on:
“Thus we are also compelled to say: “I believe and am sure that the Christian Church has remained even in the papacy. On the other hand, I know that most of the papists are not the Christian Church, even though they give everyone the impression that they are. Today our popes, cardinals, and bishops are not God’s apostles and bishops; they are the devil’s. And their people are not God’s people; they are the devil’s. And yet some of the papists are true Christians, even though they, too, have been led astray, as Christ foretold in Matt. 24:24 [Open in Logos Bible Software (if available)] . But by the grace of God and with His help they have been preserved in a wonderful manner.” [LW 24:305].
“In the meantime we adhere to the distinction made here by Christ and do not regard as Christendom those who do not hold truly and absolutely to what Christ taught, gave, and ordained, no matter how great, holy, and learned they may be. We tell them that they are the devil’s church. On the other hand, we want to acknowledge and honor as the true bride of Christ those who remain faithful to His pure Word and have no other comfort for their hearts than this Savior, whom they have received and confessed in Baptism and in whose name they have partaken of the Sacrament. These are the true church. It is not found in only one place, as, for example, under the pope; but it exists over the entire earth wherever Christians are found. Outwardly they may be scattered here and there, but they meet in the words of the Creed: “I believe in God the Father Almighty, and in Jesus Christ, our Lord, who was born, suffered, and died for us on the cross.” In like manner, they pray: “Our Father who art in heaven.” They share the same Spirit, Word, and Sacrament. They all lead the same holy and blessed life, each one according to his calling, whether father, mother, master, servant, etc. Thus whatever we preach, believe, and live, this they all preach, believe, and live. Physically separated and scattered here and there throughout the wide world, we are nevertheless gathered and united in Christ.”[LW 24:309].
http://beggarsallreformation.blogspot.com/2006/11/luther-infallible-church-declared.html
The true church has never disappeared from the earth. Luther didn’t suddenly become the first Christian in a thousand years.
And the Catholic Church had access to something of great value - God’s Word.
And yes, Israel also had access to God’s word and the prophets, and yet Israel did not recognize God Incarnate. In like manner, the Catholic Church hid God’s Word and condemned to death those who sought to distribute English translations (and later other vernacular translations) because they knew that what they taught did not line up with scripture.
The Pope of Luther’s day had full access to scripture - yet he ignored it, and hid it. The Catholic Church fought to prevent commoners from reading scripture, saying it was to high for normal men to understand. But God’s Word wasn’t meant to be hidden, concealed, ignored and despised. It was meant to be read and followed - according to the Apostle Peter:
13 I think it is right to refresh your memory as long as I live in the tent of this body, 14 because I know that I will soon put it aside, as our Lord Jesus Christ has made clear to me. 15 And I will make every effort to see that after my departure you will always be able to remember these things.
16 We did not follow cleverly invented stories when we told you about the power and coming of our Lord Jesus Christ, but we were eyewitnesses of his majesty. 17 For he received honor and glory from God the Father when the voice came to him from the Majestic Glory, saying, “This is my Son, whom I love; with him I am well pleased.” 18 We ourselves heard this voice that came from heaven when we were with him on the sacred mountain.
19 And we have the word of the prophets made more certain, and you will do well to pay attention to it, as to a light shining in a dark place, until the day dawns and the morning star rises in your hearts. 20 Above all, you must understand that no prophecy of Scripture came about by the prophet’s own interpretation. 21 For prophecy never had its origin in the will of man, but men spoke from God as they were carried along by the Holy Spirit.
And what happens if God’s Word is not paid attention to?
Peter goes on:
2 But there were also false prophets among the people, just as there will be false teachers among you. They will secretly introduce destructive heresies, even denying the sovereign Lord who bought them —bringing swift destruction on themselves. 2 Many will follow their shameful ways and will bring the way of truth into disrepute. 3 In their greed these teachers will exploit you with stories they have made up. Their condemnation has long been hanging over them, and their destruction has not been sleeping.