My version of Dwarves and Hobbits as playable races in Skyrim.
Both races have a custom skeleton and the height and shape was achieved by manually adjusting bone lengths and sizes.
The dwarves are based on the XP32 skeleton and are full scale, which means their weapons will be the same size as weapons wielded by a full size character.
The hobbits are based on the XP32 child skeleton, and the weapon nodes have been scaled up, so weapons wielded by a hobbit should be about the same size as weapons wielded by a full size character.
This is like older D&D where small characters had to consider medium weapons large weapons, and small weapons medium and so on.
Dwarves are about a head shorter than a Nord, but just as wide.
Hobbits are just slightly shorter than children.
Dwarves receive their race bonuses to lock picking and all the combat skills, except for archery.
Hobbits bonuses are archery and all stealth skills, except for lockpicking.

Dwarves have the steed stone affect, called Dwarven Endurance, as their racial ability. 
They also get a small boost to stamina regen.

Hobbits are lucky, so they get the Avoid Death perk for free.
They also get an ability called Small Folk which makes them 25% more difficult to detect while sneaking (copy of the vampire ability).

Both races use the Breton head and have the Breton presets available in character creation.

Female dwarf skeleton was scaled using UNP body, but CBBE may work ok as well.

Requirements:
Dawngard

XP32 Skelton 
https://www.nexusmods.com/skyrim/mods/68000
Not a hard requirement, but the female weapons may not scale properly without the XP32 scaling script.

TES5Edit
https://www.nexusmods.com/skyrim/mods/25859
Not a hard requirement, but you may need to use this to merge form lists in the ESP which determine which head parts are available when creating a character since other race mods and some follower mods may use the same form lists.

Recommended:
Combat Game play Overhaul
https://www.nexusmods.com/skyrim/mods/100904 

Or maybe Unlocked Grip
https://www.nexusmods.com/skyrim/mods/58973

Makes it easy for hobbits (or any character) to use one handed weapons two handed.

Issues:
Front of feet may sink into the ground a bit when in sneak idle. I can't figure out how to prevent it, but it's not that bad.
Animation is out of alignment for hobbits when drawing a bow. Since the bow and arrow are close to full scale, the draw length of the bow will be almost behind the hobbits head, and they will be griping the arrow well in front of the fetching. I don't have the skills to fix this currently. I believe it would require some kind of custom animation for the bow so it has a shorter draw. Crossbow bolts may also be out of alignment.
Dwarves sink into the horse saddle a little bit. Haven't tried hobbits yet.
Hobbits will scale up when doing the interactive tasks like smiting and mining. This can be prevented with a mod like this one:
https://www.nexusmods.com/skyrim/mods/41304
but there may be some clipping.
I have also noticed some minor clipping on some clothes and armor with the female dwarves due to their body proportions.
These were not made with Race Compatibility, so it's not required, but these Dwarves and Hobbits cannot become vampires currently. I may look more into this in the future.

A couple of the screenshots show followers from this mod that i have modified with my own skeleton and settings.
https://www.nexusmods.com/skyrim/mods/88099