There's no fundamental physical limitation, but there's certainly a practical one. The rocket equation is $\Delta V = V_{Exhaust} \ln(M_{Total}/M_{Dry})$. The exhaust velocity of a typical chemical rocket is around 2500 m/s to 4500 m/s, the exhaust velocity of a steam rocket is only 500 m/s or so...much of.
You need a delta-v of around 2 km/s to reach the Karman line. With, say, a kerosene-burning gas-generator Merlin 1D, you need a mass ratio of about 2.1...slightly more than half your liftoff mass needs to be propellant. With a steam rocket, you need a ratio of around 60.
The Falcon 9 upper stage has a mass ratio of around 30, which is excellent and largely due to it using a dense fuel, while having the light tank construction of a typical turbopump-fed liquid fuel rocket. A steam rocket would have very heavy tanks due to the need to contain superheated water at high pressures. You would need many stages, allowing you to discard that mass as soon as possible, and the vehicle would be huge for its payload even by orbital launch vehicle standards.