Why do most people prefer the i5 over the e3?

Its because few games utilize 8 threads. 4 cores are plenty for gaming. Its a different story if you're a heavy multitasker.

Xeons/high tier i7s should be used in workplaces, the i-series chips should be used for the average consumer/gamer

I'm assuming this is similar to the 4690k vs 1231v3 debate. It depends what you want it for, some people like to overclock and others don't. Hyper threading can add performance in some case, many times the performance benefit is only around 5-10% and sometimes not at all. Some people with a 4690k do more with their pc than just game and the clock speed improves other programs.

When comparing the two it's not really comparing at a 100mhz clock difference. A k series can be overclocked. I can't speak for the 6600k and how it overclocks, if using a similar comparison the 4690k was 3.5ghz (3.9ghz turbo). The 1231v3 was 3.4ghz (3.8ghz turbo). Same 100mhz difference until the 4690k is overclocked. My 4690k sits at 4.5ghz comfortably in summer, 4.6 in winter. Turbo speeds if left stock will drop when all four cores are loaded, in the case of the xeon from 3.8 to 3.6. Some people have fiddled around and managed to get it 'overclocked' by locking the turbo to 3.8 on all four cores.

Even in summer my chip is running 700mhz faster on all four cores even under full load. Meaning my i5 runs 18-22% faster all the time, not just when an application can make use of hyper threading. That's several generations worth of processor ipc improvement in one go. Not everyone cares whether they have an igpu but if a dedicated gpu goes out an igpu is there as a backup unless you have a spare video card laying around. My igpu has already saved me once and that in itself was worth it.

Hard to go wrong either way really, just down to personal preference. A xeon is still strong enough to work well as a gaming cpu and may give people who do heavily threaded tasks like video editing a boost with the hyper threading. For the tasks I do hyper threading wouldn't benefit me much and speed does.

At the time the price difference between the i5 I bought and the xeon was more like $45-50. If it had been $10 I 'might' have gone for the xeon but my experience with hyperthreading has been it's not worth anything over around a $10-15 premium to me. I also don't do a ton of video editing and when I do the extra speed of the oc'd i5 makes it pretty close to tied with the slower hyper threaded xeon. The i7 like the 4790k/6700k has the perk of both speed (out of the box), overclocking and the hyper threading plus the igpu.