To me, that passage is one of the saddest Tolkien wrote.  I hate the thought of the fat, happy, prosperous Hobbits of LOTR becoming a wandering fearful people.

On the other hand, if I recall correctly, Tolkien described earlier Hobbit-like people (in the story of Smeagol) as living in burrows.  Plus they had migrated before in order to end up where they did.  This suggests that the Hobbits of The Shire during LOTR represented the most prosperous and sedentary the race would ever get; kind of a Hobbit Renaissance, if you will. 
Although Tolkien didn't make their fate sound pleasant, maybe it was a more natural state of being for them.

One thing I DO like about the passage is Tolkien hints that there may very well still be Hobbits about somewhere, and that us Big Folk are just too slow to see them.  (Either that, or they're very good at standing very still in gardens until we pass by) ;).

"I don't suffer from insanity...I enjoy every minute of it!"