@Nightblade SFF is niche for a reason. I think both you and your friend are right. People can have differences in values. You just have to decide what's most important to you.
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In my opinion, the case is important because it's the only part you really have to look at and it usually lasts the longest out of any of the other parts in your system. That being said, unless you're putting your components in an oven you don't gain any performance from buying a more expensive case like you would by investing in a more expensive CPU or GPU. If you buy a cheaper case and power supply then you can afford a nicer GPU or CPU (GTX 1080 or i7-8700). The size of the case is also important to me because I travel with my PC a lot. Buying a laptop could make sense in the short term but the price to performance I get out of a desktop computer outweighs the laptop in the long run.
I personally think the S4M is worth more than $199. The form factor and pure craftsmanship of the case are great. On top of that, as I've said before, Josh is a great guy. It's comforting knowing my purchase is helping to support someone doing something they love for people that share my interests. My situation was different though. I already had an ITX system. I just needed to swap out the PSU and the case. For me this was more of an upgrade. I didn't have a system build budget to deal with.
For components, it depends on what you plan on doing with your computer. If you plan on gaming, I would recommend the i5-8400. If you plan on streaming or editing video or doing other similar productivity work I would recommend going with the r5 1600. i5-8400 > i5-7500. I think the two extra physical cores will be more than worth the extra $50 in the long run.
One other option is to go with the i5-8400 build and just wait for the H370I boards to come out to save a bit of money. This will make the price more in line with the i5-7500 build.