Why did Hashem opt to dwell among Yisrael?
Seforno: In order to accept their Avodah with good will and to listen to their Tefilos.
And what did He mean when He told Moshe that 'He would be for them a G-d'?
Seforno: He meant that He would see to their needs directly (Hashgachah K'lalis) without a medium, and that they would not be subject to 'the signs of the Heaven', 1 thus ensuring their eternal existence.
This is due to the fact that Yisrael are superior to (the hosts of) the heaven, which is led (not by Hashem directly, but) by the powers that Hashem designated (Seforno).