The first question Hermione wants to ask is what year is it, since even wizarding communities have cities, or at least have small factions living secretly within larger cities. What he's describing sounds more like a fiefdom than it does any form of modern living... even if she realizes that "modern" is sort of a relative term.

Instead, she asks, "Wait... so people - non-magical people - live among elves and dwarves and such, but it's magic they stare at?" Considering that elves and dwarves are considered magical beings and the average Muggle is designed to try and explain away shows of magic with logic, that all strikes her as somewhat backwards. Delightful, for the elves and dwarves, and not entirely inconvenient for her, but still backwards. "I'm used to hiding my magic; it's just that magical creatures aren't always well-regarded even among the magical community back home. Not that I agree with that, but it's a bit of a different sort of mindset. Non-magical people just assume there is no magic in the world."