[Diamond18]

This may be simplistic, but what readily occurs to me, is that the "clustering and hiding" of these non-human cultures, just works to further their fading. In other words, perhaps if Tolkien had them all mixing freely, it would be harder to believe that Elves, Hobbits, and Dwarves eventually disappeared or went into deep hiding, which leads to them being mere "myths" in today's culture.

Could this just be a way of Tolkien's to segue his world into ours? “They're gone now—what was the process that led today's "all-human" world?” If you lock a plant away from the sun, it dies. If you lock away the Hobbits, Elves and Dwarves, they disappear.

Again, I know that's a bit simplistic, but it does make sense in a way. If we're to imagine that this is a pre-history of our world, you have to sow some seeds for the transition.