Stories about elves and the hidden people are among the most important elements of Icelandic folklore. The hidden people have the appearance of human people and are similar to us in size and shape. They live in hills, large rocks and cliffs, but when you enter their homes they turn out to be very similar to human dwellings. The hidden people have cows, sheep and other domestic animals. Their occupations are similar to those of humans.
The origin of the hidden peopleOnce upon a time, God Almighty came to visit Adam and Eve. They received him with joy, and showed him everything they had in the house. They also brought their children to him which he found promising and full of hope. Then He asked Eve whether she had no other children than these whom she had showed him. She said "None." But it so happened that she had not finished washing them all, and being ashamed to let God see them dirty, she had hidden the unwashed ones. Of course God knew, and there for said angrily to her, "What man hides from God, God will hide from man."
These unwashed children became invisible, and later found a home in mounds, hills, and rocks. From these are the elves descended, but we men from those of Eve's children whom she had openly and frankly shown to God. And it is only by the will and desire of the elves themselves if humans can ever see them.
The hidden people can be either friendly or hostile towards humans. They reward those who are good to them, but they are also very vengeful if you do them harm or cross them in any way.