I'd wager one can do the same thing with any race, for example making dwarves or elves redundant if one wanted to. The last few years has demonstrated amply that an almost infinite amount of tweaking can and has been done to the core races so one can think of any possible variation.
Absolutely. I just noted that gnomes were the first to go. They seem to fit the niche between dwarves and halflings and perhaps even elves the way that half-elves and half-orcs also fit into between points.
However, playing the devil's advocate here, what race is traditionally (i.e. before 4-5 years ago when 3.5 came out) associated with the Magic School of Illusion?
Rakshasas. Okay, wait, that's just me. (You ask me to think of a race traditionally associated with illusion, and bam, rakshasas: dark like thunderclouds with golden earrings, children of Golden Lanka, cunning and terrible.)
The problem with such a limited niche is that it's not pre-supposed without the existence of gnomes. Remove gnomes from a game, and nobody asks, "Hey, where's the race that's associated with the school of Illusion?" After all, nobody is asking where the races are that are associated with Necromancy, Abjuration, Conjuration/Summoning, Divination, or whatnot. It's a niche created to give gnomes something to do, not a pre-existing niche that called out to be fulled.
And what race typically hides their communities using illusions?
Same thing. It's sort of in the same lines as "What race is typically described as being the smaller and more magical kin of dwarves?", or, to reverse the devil's advocate position, "What race is described as the fallen remnants of a human race tainted with infernal evil?" It's added flavor to help make the race distinct, but it doesn't posit a vital role for the race that couldn't be used by others. If someone says "I want to have a community hidden by illusion" and there are no gnomes in the game, they can use elves or humans or really any other race: they don't have to invent gnomes to make an illusion-hidden community make sense.