I am not sure if this is an expected behavior or not, but what I added
the custom entries, I expected them.

If we feed dnsmasq with entries like:
address=/foo.bar.local/127.0.0.1

These hostnames resolve when doing a dig / host, but when using the real
tools (ping, web browser), the host name is not resolvable.

It took me a while to narrow it down to dnsmasq. If the same is fed to
/etc/hosts, things work fine.