In my campaign, characters are created by setting the six stats so the stat bonuses added up to +10, then add +1 to three scores to make them odd. Characters can generally get a lot of mileage out of adding their level-based stat bonuses to the odd stats, or they can run up a single score and leave the others alone. Racial mods were really just mods to the maximum initial score for that ability. So a -4 to Str would limit that score to 14, but that 14 is as easy to achieve as it would be for a human. IMO this makes -4 adjustements viable.
Along those lines, my "hobbit" race would look something like this:
Ability Modifiers: -4 Str, +2 Dex, +2 Wis. Hobbits are very weak physically, but are nimble and a lot wiser than they look.
Good Luck: Hobbits gain a +1 luck bonus to all saving throws.
Finesse: Hobbits gain a +1 competence bonus to attack rolls when using thrown weapons, missile weapons, or any weapon that qualifies for use with Weapon Finesse. The latter bonus applies even if the hobbit does not possess the Weapon Finesse feat.
Dodge Big Folk: Hobbits gain a +2 Dodge bonus to AC for each attacker size category beyond Small. This bonus does not apply when the hobbit is flat-footed.
Small Size: Base Speed is 20, +1 to AC and attack rolls, and +4 size bonus to Hide. Small weapons tend to deal less damage than their Medium counterparts.
Notes: It is my belief that Bilbo and Frodo, and to some extent Gollum, were exceptional hobbits who took the Iron Will feat and put points into stealth-related skills. The legendary hobbit ability to "disappear" was probably due to observed accounts of Bilbo doing just that when Sackville-Bagginses drew near. As we all know, he had some help in that category...