"Wealthier" in the sense of "can qualify for a larger mortgage". But the ability to qualify is skewed by the fact that the money that is borrowed is printed on the spot when the mortgage is created; it doesn't come from actual savings. If that didn't happen--if the money loaned out for mortgages had to come from actual savings--the market for mortgages would look very different, which means the population of people who were looking to buy homes would look very different.

And not just that everybody would have less buying power across the board--the people who would qualify for mortgages in a free market would have different financial habits. For one thing, they would have no incentive whatever to use "creative" loan vehicles to buy more home than they could actually afford--which is what many of the "wealthier" people who are bidding prices up in the current market are doing.

> They probably can't choose a smaller home, because the small home prices get bid up along with the other homes.

But a smaller home in a given area still costs less than a larger home in the same area. Furthermore, in a free market for loans, where the government wasn't printing money to finance them, smaller homes would probably be more common, compared to larger homes, than they are now, which would reduce the price of smaller homes relative to larger homes, over and above the general price reduction that would take place if the government stopped printing money for mortgages.

> Where do these people actually wind up? In undesirable locations: places with higher crime rates, more obvious poverty, worse public services, etc.

This is another example of government failure. If the government spent its resources on what it was supposed to be doing--ensuring that everyone's rights were respected--instead of trying to run expensive and damaging experiments with the economy, there would be far fewer locations that were undesirable in these respects.