I still think you're misinterpreting the point about language, or at least looking only at the specific examples rather than the broader ideas to which they refer. The Tamrielic idea of race clearly doesn't match up to species. Aside from the fact that the term "species" belongs to a biological discourse that doesn't fit Tamriel, virtually any definition of species you put forward doesn't fit with the races of Tamriel; if you accept a relatively colloquial use centered around interfertility, you obvious have huge holes all over the place; if you go for a more taxonomical usage, the Khajiit and, to an extant, Argonians absolutely ruin your day; and so on. "Ethnic group" has similar problems. Firstly that the term comes from a way of ordering the world we don't really see in Tamriel, and secondly that even if we shoehorn Tamriel into this way of ordering, none of the modern understandings of ethnicity really map to a race of Tamriel as a whole; groups like Colovians or Reachmen are more analogous to ethnicities than are Tamrielic races as a whole. As you've said, the modern use of race doesn't fit for a variety of reasons. The Renaissance use of race, however, does.

Firstly, it's pretty loosey-goosey as a term. Because it comes from a time when knowledge was grouped by similarity rather than identity and difference, there isn't the emphasis on precision of meaning and exacting delineation that "species" or "ethnicity" has; I brought up its use to refer to such a wide variety of groupings not to argue it's used to refer to families in the Elder Scrolls, but as an example of how the term would have no trouble reconciling the vast differences of the various races in the way a term like "species" or "ethnicity" would. For example, the older usage of "race" can include all the disparate breeds of Khajiit within a single race and differentiate the strikingly similar types of men and mer into eight with equal ease; it can account for various theories about the matter of Argonians and Saxhleel in a way the ideas of species and ethnicity cannot. None of the other terms you've put forward, in their standard contemporary usage or primary historical usages, can really account for that.

Secondly, some of the stereotypes are not commonly-held opinions about the races, but actually part of what defines them as what they are. Again, this is straight out of the renaissance, where the accumulation of knowledge was based upon reading the divinely-inscribed signs of the world to tell what was like what. As such, being a berserker isn't a stereotype associated with orcs, it's a sign of being an orc; even if it never comes out, that power is inside every orc and is part of what makes them an orc. Just so, being a warrior is part of being a nord, and even an individual who consciously rejects this aspect of his heritage nonetheless possesses it. Here, also, is the main discontinuity between thinking real life beliefs of a certain kind are stupid and not thinking the same about fictional beliefs. Just because I'm American Indian on my mother's side doesn't mean I'm a naturally skilled tracker or otherwise possessed of an unusual kinship with nature, or have some inborn aptitude for the bow or tomahawk; were I a Bosmer on my mother's side, however, I would have a natural affinity with bows and an innate ability to speak to beasts. Lastly, because of this and because of the broader similarities of the two worldviews in general, racial attitudes in Tamriel have more in common with racial attitudes of the middle ages and renaissance than enlightenment or modern attitudes on the subject.

Given all of this, race is not just the right term to have used in the sense that it can be justified, but in the sense that an archaic use of "race" is the signifier which best represents the kind of grouping being signified. Because that use is not standard any more, it's helpful to contextualize it (hence my efforts to do so) but just because it's no longer standard does not mean it can no longer be used. It's not a matter of "the developers could have meant," it's that, regardless of what the developers meant (they were probably just going along with a genre convention), the older understanding of the term "race" most accurately represents the cultural grouping they depicted.

Because the kind of groupings we see depicted are not species and are not ethnic groups, it's untenable to try and understand them as such; I can think real-life racism is stupid and also believe certain preconceived notions about Tamrielic races are totally justified without any contradiction because the categories of belief are completely different. An arbitrary delineation based upon a certain degree of physical similarity obviously establishes basically nothing about your aptitude and personality, while a divinely-inscribed delineation signified by your aptitudes and personality certainly can establish a great deal about them; the belief that American Indians have red skin because they're associated with the devil is straight-up racist, but the belief that the Dunmer have blue-grey skin because they were cursed by Azura is straight-up true. So while I do understand you didn't intend to accuse anyone of racism, or frame your argument around it, the point remains that race functions differently enough in Tamriel from our modern understandings of race (or ethnicity or species) that comparing the two, for whatever rhetorical purpose, isn't a sound argument.

In other words, while still believing in individuals, I also think there are enough aspects which are intrinsic to Tamrielic races that, especially when combined with racially-motivated and racially-constituted religious or political ideas, certain concepts strain credulity to the point that, while not technically impossible, I'd say they're not really "lore-friendly" in any meaningful sense of the term; the amount of stretches one would have to make to accommodate the established lore are great enough that, while arguably possible, the character ceases to really be believable. So at a certain point, all saying that anything is possible does is see the question "Is my concept lore-friendly" remade into "How can I make my concept lore-friendly," which then goes back to the first half of my initial argument.