Sorry guys, there is one subtle point that you are missing. You say that the balloon will rise relative to the earth. Of course that is because you assume that there is a buoyancy force on the balloon. That will only be true if the air in the elevator feels a downward force from gravity. If the elevator is in free fall (i.e. there is no outside air friction on the elevator to keep it from accelerating downward at the acceleration of gravity) then there is no gravity acting on the air inside the elevator. At least not from the point of view of the observer in the elevator. And so there is no buoyancy force. So the balloon falls at the same rate as the elevator and passenger. They all think they are weightless. At least until something (probably sudden and at the bottom of the elevator shaft) changes the assumptions.