There are absolutely more 3* players (both in college and in the NFL). That doesn't mean 3* players are better though. As you point out, it just means there are more of them.

The "normal" 5* or 4* VASTLY outperforms the average 3*. Of course there are exceptions, but they're called exceptions because it's unusual. Getting better recruits correlates highly with team success, higher AP rankings, and a stronger NFL pipeline.