Fascinating view into the minds of children...
Magical thinking is quite ordinary (although your 7yo is close to outgrowing it)... but it is somewhat important that you don't 'take over' the fantasy, and make it more real than their current willingness or interest in playing along. This is a delicate subject, but generally when a child starts questioning it out loud, it's a good idea to tell the truth, or at least not outright lie. 'Yes, Santa is real,' is a lie... 'what do you think?' is avoiding the answer, finding out what they're thinking and possibly and opportunity for your child to join you on the fun side-- helping portray the myth for siblings.
Unless you can be assured that aliens do not, in fact, exist, and will not appear in your child's life in physical form, it's a good idea to do what you did: tell the truth. While there is no reason to believe aliens exist, there is also no logical or physical reason why they can't, or any proof that they don't... and the fact is the best scientific guess at present is 'dunno.' Or, possibly more accurately 'why not?'
I never had any qualms about 'playing along' with the fantasies like nymphs and fairies and aliens and being able to turn monsters into floppy bunnies, Santa, etc., I never outright said 'of course they're real, dear,' so I avoided something a friend accidentally walked into...
With her only child, she persuaded the girl that yes, Santa does exist, and went to elaborate means to 'prove' it, until the child was well past 10. Imagine being a 10yo and encountering a child 2 years older than you who still believed, really, that Santa was real. To say that she was humiliated when she found out they'd lied doesn't leave room to describe her cold, hard fury about the subject that lasted more than a decade. She refused to have anything at all to do with Christmas entirely, and as soon as she was old enough started travelling to foreign countries where it doesn't exist for the season. Last I heard, she was 24 and still refused to have anything to do with it.
This is certainly an extreme case, but a cautionary tale for anyone who thinks 'playing along' past the natural age of growing out of this (7ish for most normal children) would be a good idea...