Host.does.not.exist should not resolved to 127.0.0.1

Could you do the following to help us debug your issue?

Run

sudo service dnsmasq restart
pihole -d

on your Pi-hole device. While it tells you to browse the web, run your dig command on one of your clients.

You can then upload the debug log and give us the token (it will be securely shared with the developers only) or manually look though the stored log at the location the debugger tells you (whatever you like to do). Restarting dnsmasq first is necessary to be sure that the cache is empty (mistakes might be masked otherwise).