Tons of RPGs have many, many towns for you to visit. Lots of them have NPCs that you can talk to, interact with, buy things from, the usual. But aside from that, you rarely seem to get the feeling that they're any more than just set pieces there to give you an idea of where you should go next.
Granted, a lot of these games focus more on character development, gameplay, graphics, or what have you, but these towns often have little feeling, as if they the characters had been designed to just be places for you to look at and then leave, going back to the meat of the gameplay and tossing aside the people supposedly living in them. That's great and all, but what about when you want to feel like what you're doing in a game is actually affecting people who actually have personalities?
One good example of "Living towns" in games is in Ys, Ark of Naphistim. Since there are few towns in the game to begin with, having people say the same thing over and over. But they went the extra mile and gave many, if not all of them personalities, and a few have names, even if they weren't important. While it's been a while since I've last played the game and can't remember them all, a few unimportant characters spring to mind.
The shopkeeper from a nearby, different town who harbors no ill will towards the people he's selling things too, and wishes for tensions to disappear. The dorky kid who always has a crazy grin plastered on his face. The guard of the chief who demands that you earn his trust. The two related shopkeepers, one inside a store, the other kicked out to sell things on the street due to selfishness on the part of the other. The construction workers always looking to improve the city's buildings.
Almost none of these people have very important roles, but their character development is rather well fleshed out for just being NPCs.
Perhaps it's the effect of games being built around small "hub" towns. Other games with only one or two towns often have the characters in them more well-developed.
Legendia is not as great an example as before, but you can still get some of the feeling that the town is alive, reacting to the events that occur based on their personality. Since it's just one town, it's be odd if they only said a few things, correct? However, games with "hub" towns tend to go the extra mile and give at least some characters that are unimportant some character development, letting you feel attached to them and feel that much more important in what you're doing in the game.
And on the extreme end of living towns, we have games like Harvest Moon and Animal Crossing.
Now granted, you might just play these games for the farming aspects in the case of Harvest Moon, or interior and town design in the case of Animal Crossing, but a lot of the charm of these games comes from the characters you interact with, almost all unimportant to advancing in the game if you choose not to interact much. Now granted, negative actions in these games are hard to do, or negative actions are dismissed by characters easily, but if you behave well, often times the characters will grow to like you in these games and share more things about who they are, and probe more into who you are and what you think, similar to how another person in reality would do.
In the end, I'm no psychologist, I'm no sociologist, so I'm talking out of my ass when I say this, but I think that perhaps it's the human tendency to assign human characteristics to non-human entities that makes living cities feel just right. I suppose that after all is said and done, people feel more comfortable around things that they feel are alive and understand them in some way, even if it is just a game.