It makes sense that The Shire was drawn into Faerie, after all, the inhabitants, Hobbits, remind us of the 'little people'. They are like the creatures of Fairy Tales, boggarts, hobgoblins, pucks. Maybe The Shire really is there, just inside Faerie, which is why these little creatures pop out now and then to play games with us.
Perhaps Valinor too is there, but further in, only to be visited by those mad or brave enough to really venture far...
A couple of interesting points struck me from what Tolkien said in the passage davem used, though I'm not sure how useful or relevant they are. I'll post my thoughts anyway.
Firstly, why a Smith? The smith was in ancient times often associated with magic; he would take stone and turn it into swords through his craft. Smiths are a common figure in mythology too, symbolic of both strength and magic - e.g. Wayland, Vulcan. Why did Tolkien choose a Smith over say, a farmer?
Secondly, does Tolkien seem to deny the underworld as a possible entrance to Faerie? His work does not bear this out, as it filled with those symbols and images. But he then lays claim to the woodland as his own entrance to Faerie. What interests me here is that the Druidic religion revered the woodland, worshipped there instead of using man made buildings.