In the battle of Red Mountain, Kagrenac used his tools on the heart of Lorkhan and the entire race disappeared, except for Yagrum Bagarn, who was in an Outer Realm at the time. According to Vivec, Kagrenac used his tools when he was losing the battle. Is it possible that he used the heart to flee and teleport the Dwemer to an outer realm? If Bagarn could travel to and from an outer realm with ease, it seems likely that the Dwemer had built civilizations in outer realms. If the Dwemer all teleported there, maybe they started to improve their technology and prepare to come back to the mortal realm sometime in the future? A few eras have passed since then, but it's still a possibility.