davem, that quotation is exceptionally interesting for presenting Tolkien's ideas on Faery, but at the same time I want to say, "Whoa, wait a minute!" He's adding so much more 'backstory' that essentially he is nearly rewriting the story. I'm not sure the story can sustain all the implications he makes there, but of course a fragment such as that can't give full flavour.
And as pertains to the discussion of magic realism, that passage seems even more to move away from the mode and tone of, say, Garcia Marquez or Salman Rushdie.
Fea, yes, I remember that it was a German art critic who first used the term, but I also have a vague recollection that he really didn't need to use it, as Surrealism was what he was really talking about?
I don't know about Tolkien giving so much detail as to create a hyper-realistic world. It's the gaps in the detail I think that quicken the imagination.
anyhow, must scoot now, some non-hyper work calls.