The main reason is -according to Mr. Velvin- :
"...The treacherous diplomacy of the subtle House Dagoth, or both. House Dagoth, however, was reviled as oath-breakers for their treachery at Red Mountain."
But the only oath braker that seems to be recorded was Dagoth-Ur and even then that would be an over statement since he was concidered tainted and deluded due to his time left alone in the Red Mountain with the Tools. He was known to be a faithful friend of Lord Nerevar, he helped in the war against Dwemer (this is proven). So he got a bit over protective and took his mission a little bit to much on the litteral side but heck that is not a reason to exterminate a House!
Nevertheless as innocent as the House Dagoth would seem to me, they have clearly turned evil, you just need to play Morrowind to see that (naked maniacs are definitely rated as "baddies"); although as one finds out in reading the Poison Song series they are not evil Dunmers at all but controlled Dunmers, controlled I would believe from none other than Dagoth-Ur himself (blast him!); so we shun these people for a couple of millinaires, however Mr. Ur has bitten the Dust thanks to our favorite hero : The Nerevarine!
Do have have an outcome of these victimes? I grant you that their fate is much less epic than what happened to the Dwemer that just desepaired but the result and curse on the Dagoths is tragic nonetheless! Don't you agree? :shrug: