Why is it that only fshawe points out the obvious: it's a joke? Why isn't "it's a joke, son" the very first reply? You guys will dismiss most of what's seen in Oblivion as the product of laziness and stupidity on the part of the dev team, but bend over backwards to incorporate an obvious joke into the lore?
We do it because it's cool. Little details like this make the place special. Now Morrowind is a place where the wildlife is so annoying, not even Dragons will stay. How often does that happen? Just like the absence of horses because the grass ain't right results in people having to ride Gaurs, Stiltstriders or giant hornets.
It's those ideas and the ease by which they can be made to look as completely natural that makes this fun. Cyrodiil as shown in Oblivion doesn't allow for that strangeness because it's all too ordinary.
If you compare Oblivion to Knights of the Nine for example, you can really see how Knights of the Nine adds that almost absurd divine and magical thinking back to the world. This makes it allot easier to explain why Pelinals armour is repaired on the stand.
For example you can assume he's from the future going back into time, or it's got nano bots doing repairs. Of course the boring explanation would be that the smith fixed it but that's not half as cool and nevermind the real explanation: gameplay.