For clarity, my understanding of the OP's sentiments is that the explorable content of any given city, town or even village, shouldn't attempt to represent the entirity of said city/town/village. In short, we should be able to explore the bits key to us, while non-key areas are left out of sight so the town doesn't appear tiny.
Personally, I'm not terribly bothered by it, although I can see the logic of the OP's point. Given that some of the first RPGs I played had an active town population of around 10 people, and a visible global population of less than 100 people, I find it very easy to suspend my disbelief in this regard. Obviously the OP and others struggle rather more with this, and the OPs suggestion is a good way of getting around it. So in that sense, this idea has my (admittedly somewhat passive) support.
What I am desperately against, however, is the expansion of playable areas to include the true scope and size of the mundane. I do not want a town of 10,000 explorable houses, each with four npcs inside. I don't even close to a hundredth of this. I do not want to search 100 houses to find the ten that have quests in and the one that has the swordsword +3 in the attic. The sense of exploration made the infinity engine games; the exploration of the world map, the exploration of dangerous areas, the discovery of key things within towns. But what the IE games were generally so good at was providing exploration without delving into workmanship. Carefully searching through difficult monsters in the sword coast was exciting, checking each of the unguarded 20 containers in the hub could be rewarding... ...routing through several thousand empty crates in Fallout 3/NV was a bloody chore. And the games punished you if you chose not to do it.
Immersion is good, but the prime concern should always be gameplay. The likes of TES and the console Fallouts got, in my opinion, on the wrong side of this line. 100% immersive cities would be even further in the wrong direction. Unless I'm picking a suspect between the baker, the butcher and the carpenter, let's leave them out of sight.