Would this be one of those times when it's appropriate to get a bewildered look on your face, blink a few times in confusion and then say, "Umm...do you realize you just said that out loud?" Subtle, yes, so they may not get it, but if it causes them to think about what they said, even for a second, then you've accomplished something with a minimal amount of confrontation.
And re: the title of this thread, you're staying in a hotel, so I would suggest that you just avoid their house if you're uncomfortable. You're not forced to be in their house (although I get that you're supposed to visit with them even though you're not sleeping there). Frankly, they're hosting you (in the hotel) AND they're paying you back for a big favor, so they should be doubly conscious of not offending you and making you uncomfortable. So if you hear something racist, pack up and leave immediately, no matter what you're doing. If questioned, say, "The racist remarks and terms make us really uncomfortable, and we don't want DS to be exposed to that and think it's okay with us. So we're just going to go back to the hotel now. We'll see you tomorrow."