"Realism" is always a difficult topic in the fantasy & science-fiction genres. Obviously there is not much "reality" in having an elf wizard levitating on a flying carpet on her way to the local apothecary to pick up some beetle elbows to later be used in brewing a potion of freedom. But where "realism" does come into play is how the otherwise fantastic characters react to situations according to their personalities, experience, and beliefs. In BG1, a lot of the peasant homes would politely greet the player character and then ask them to move along. If you were in the same situation, and had an armed party of wizards and sword-wielders suddenly enter your home, what would you do? There is actually quite a range of creative writing that could be applied to humorous effect in the village homes, some of which could even require use of some of the party's skills. Not all encounters require combat! For example, there could be an old grandmother who is hard of hearing but loves an audience to listen to her stories (which might give a clue to a quest), or a working mom with a sick child who needs healing, or group of university students renting a haunted house, etc.
When you're working with a larger-than-life protagonist-centered fantasy, there's more freedom compared to, say, "Medieval Sociology Simulator".
