Tolkien did of course try to explain the etymology of the word hobbit within the Middle-earth context as being
hol-bytla or 'hole builder'. But there's always been something of the real world about the word.
The use of the word hobbit or anything similar prior to Tolkien was scanty. And I'd not heard this new use before at all! There's the more well known possibility of it being linked to folklore terms such as hobgoblin/hobby oss/hobbledyhoy. And the word hobbit does occur in the Denham Tracts, which is a mid Victorian (and mad and rambling) collection of folklore, stories, lists, proverbs, etc. Again this is in connection with a British creature of folklore.
It's likely that Tolkien did somehow read the word used in both ways and store it in the back of his mind to be brought out again subsconsciously on the day he was bored while marking exam papers and wrote that first line of The Hobbit down. He was later to be credited with creating the word - did he do that or just give it a new meaning?
I find it satisfying that a hobbit is also a big measure of oats or barley
