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The huldufólk are thought to live in another dimension, invisible to most. They build their homes inside rocks and on craggy hillsides, and they seem to favor lava formations. The port town of Hafnarfjördur, near Reykjavík, is thought to have a particularly large settlement of elves—as well as other mystical beings like dwarves (who also fit under the broad category of huldufólk). According to local clairvoyants, the huldufólk royal family lives at the base of a cliff in that town.

Read about it here:

How do you find an elf? - By Juliet Lapidos - Slate Magazine

and:

Icelandic Elf School - Wikipedia, the free encyclopedia
 
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