Hobbits live in luxurious underground houses called hobbit-holes.
Hobbits live in The Shire. Bilbo lives in Hobbiton, although there are other nearby towns. The Shire is rural and composed mostly of farmland, but is bordered by woods.
The beginning of the book explains that the hobbit lived in “a hole in the ground.” Yet the narrator goes on to explain that this is not just any hole.
Not a nasty, dirty, wet hole, filled with the ends of worms and an oozy smell, nor yet a dry, bare, sandy hole with nothing in it to sit down on or to eat: it was a hobbit-hole, and that means comfort. (ch 1)
Hobbits enjoy food, good times, and company. Their holes are like regular houses, but hobbits enjoy being nestled into the sides of hills. In most ways, their houses are similar to those of man. Hobbit holes are smaller though, and have shorter ceilings. A dwarf or a man would find them kind of tight and probably hit his head on the ceiling. The door is round, with a shiny knob in the middle.
The hole is one story, and the best rooms are the ones on the outside because they have windows. Hobbits enjoy having visitors, so they always have comfortable chairs and pegs for coats.
Bilbo is a rather well-to-do hobbit, even before he gets his part of the treasure. He appreciates comfortable chairs, books, and lots and lots of food. He also has family heirlooms.