I really don't know how to explain this, so I will just do my best. I love that there all of these wildly distinct fantasy races in Tamriel and yet their interactions and relations with each other feel real and organic. Like it seems in some other fantasy fare there is always attention being drawn to the fact that these are OMG!fantasy races. Like you just can't forget that these are elves we are talking about...elves! But The Elder Scrolls lore isn't like that. When I read TES lore it really feels more like a world that just happens to have fantasy races in it. Their wars and alliances with each other seem more based on the real world. Like there is racism, but it feels more real. I don't even know if I am making much sense here, but I guess what it all boils down to is that a lot of times in TES lore I can't tell if I am reading about an elf, or a human or what have you (unless their name is obvious, or their race is mentioned), because the lore treats them all like individuals instead of saying...oh look we have elves in this world, isn't that just so fantasy and awesome?!

OK, I will stop incoherently rambling now.

I remember the first time I played Oblivion (my first TES title) how cool creating my character was. The first few races I saw were all pretty "human-looking" so I was kind of disappointed. But then I get to Argonians and Khajiit and Dunmer and they are all so cool and different looking. And then later I look into lore and find that they all have unique interesting lore behind them. And then I also find that even the Nords and Imperials, which seemed like boring "human-races", also have cool lore behind them. Plus, like you said there is a little tension and racism that makes it feel more real. In leyawiin you see argonians and khajiits mocking eachother, and a countess who hates some of her beastly subjects. Everyone remarks about the count of Cheydinhal being a Dark Elf. Everything combines to make it seem so real. Also I think its funny that lots of bosmer (the adoring fan, glarthir, Thurindil, etc.) are crazy.

Yeah, it makes sense. I have always admired their approach to realism with the lore. Even in Arena where it was a lot more traditional fantasy, you still had that strong sense of politics and conflicts between factions and ethnicities. Its funny being a nord and walking around hammerfall, then asking someone for directions who happens to be racist against nords. "What do a Nord and a bottle have in common? They're both empty from the neck up!" Comments like that are very common actually. And when you step into a palace the first time, they describe the courtly setting and the mood of the petitioners in a way that feels very realistic. It just felt that the world was alive.