HOORAY! A worldbuilding topic! I'm a fanfic writer - I'm good that this. I lampshade and try to explain away stuff like this in my deriviative works all the time. Let's have fun with this!
1. why is it that Hyrule keeps rearranging their villages and cities?
The Goddess Din keeps geologic and siesmic "disruptors" throughout the land, by which she rearranges the landscape at will. The cities and villages of course must move to accomadate the shifting landscape. This also explains why Hyrule has such a small population - many deaths from frequent, massive earthquakes.
2. where the hell is Kokori forest we don't see it anymore
It is the Faron Woods and Ordon Village area in TP, or the Lost Woods in A Link to the Past, etc. Settled by other races (Hylians/humans). The Kokiri are still around in small numbers, they just hide themselves in deep, secret places and mostly are just invisible. They are like fey now, visible only to those who search and trust. Most people stop seeing and believing in them after they reach a certain age of their childhoods.
3. why does Zelda have pictures of Peach, Yoshi, Mario and Luigi?
Hyrule and The Mushroom Kingdom are different universes, but sometimes, universes connect. One can argue that this happens in our own world whenever someone reads or writes a piece of fiction. Tales of the Mushroom Kingdom are in Hyrule's books - the childhood bedtime stories that little Zelda loved to read. So, she has pictures of her favorite literary characters up in her bedroom.
Or maybe video games exist in Hyrule and we are never allowed to know it. They run on magic there.
4. why does that mask salesman have a Mario mask and where did it come from?
It is either the mask of a storybook character that is a favorite among children in Hyrule, or the Happy Mask Salesman can travel between dimensions and picked up a mask of the Mushroom Kingdom's greatest hero along the way.
5. what are redeads really supposed to be? some kinds of zombies that somehow lost their colors?
Have you ever seen an unwrapped mummy? The skin is discolored/dark both from the drying process and from the resins the ancient embalmers used. We know from Majora's Mask that ReDeads are probably Gibdos without their wrappings. I personally enjoy fictionizing that they are the remains of the honored dead - members of Hyrule's royal family, past forgotten heroes and once-notable names whose remains were given the honor of mummification in order to "keep these great people with us in a way." Unfortunately, when evils rise up in the land, evil magic will somtimes seep into the tombs and re-animate corpses. The spirits of the original people are not there, however, it's just magic animating the bodies. Stalfos happen the same way.
6. ya know, that goron in Zora's Domain in TP should have drowned according to MM
Termina is an alternate universe. It doesn't always share Hyrule's physics, nor it's paralell-people its biology.
7. why doesn't Zelda try to take down Ganondorf on her own? i mean if he keeps knocking her out it's obvious that he's awre that Zelda is apparently more powerful than he is
Wisdom is a way of peace. It is not the place of wisdom to be violent. Zelda's domain is in wisdom, magic and peace. She occasionally fights when it comes down to the wire, but it would seem that it is her divenely appointed place to wait while it is the divinely appointed place of a rough peasant-boy to take out the trash. Perhaps Zelda and Ganondorf are actually equal in power - his is for conquest, hers lies in barrier magic/protection. For her to really knock-down drag-fight in Link-fashion may require her to redirect the massive amount of power she puts into the "general protection" of her land - and thus, more and worse monsters roaming around and more deaths among her citizens than the "wait on the Hero" plan.
I don't know. I just pulled that out of my tail.
8. EPONA IS INVINCABLE!
Oh, this is my bug-a-boo. I work with horses in real life. They are much more fragile in real life than fiction would have you believe. Epona can run forever, never strays - comes when called, can remained saddled perpetually without developing sores or fungal infections, doesn't ever throw a shoe, never colics... can take an arrow to the head....
Epona is a magic pony or a robot. Only explainations.
9. why do the market guys never give Link things for free, i mean he has a sword and shield you would think they'd be afraid of him, just havehim take the sword out and he should be given what he wants for free
Swordsmanship seems to be rather common in Hyrule. It's like guns in the Old West. The saloon didn't give anyone their drinks for free just because they had a gun on their belt. In modern times, donut shops don't give freebies to cops *all* the time just because they wear guns. Same applies to swords and Hyrule. Link is an honorable swordsman. He's not going to threaten innocent people just to get stuff. He respects Hyrule's capitalist economy.
10. why do we need Navi?
Nintendo assumes that the first time player of OoT is young and stupid and needs a persistent guide. In-game... well, Link is both lonely and sane. A companion that takes care of both of those conditions was needed.
11. those guys in Lon Lon Ranch look way too much like Mario and Luigi, relations maybe?
They are parallel selves. What did I say earlier about other dimensions?
12. why does everyone live in a cave in the original Zelda?
Ganon and his reign destroyed the economy, the cities, the towns, and everything. The remaining citizens live in abject terror. They dare not build houses for fear of monsters, so they run a literal underground resistance hidden among the trappings of nature.
13. what happened to Error?
He was corrected.
14. if there's no female gorons how do they reproduce? is it like the Nameks from Dragon Ball where they puke out eggs?
Goron females exist. They are indistiguishable to the eyes of outsiders from the males. Sexing Gorons is hard work and involves a Katamari.
15. what the hell are the Ooccoos supposed to be a half human half bird? i'd hate to imagine how they began
They are incomprehensible cosmic beings. Seriously, this is the most benign form they could take to the eyes of mortals. Either that, or the Goddesses of Hyrule love chickens.
One of my stories (in all seirousness) had them as beings that were genetically engineered to incubate the eggs containing the firstborns of the in-turn genetically engineereed races of Hyrule. It is natural to want chicken-like creatures to incubate eggs.
16. how does wearing a blue tunic suddenly make it so that you don't drown? there's no scuba gear that comes with it of any kind, is it like a body equipment from an RPG? blue tunic increases your defense twards water by 100%?
Twilight Princess made things more realistic. As for the original OoT tunic, I'd say that the blue fabric is enchanted and, adhering to Link's skin, transferrs oxygen from the water right into his blood via his pores.
