Cyrodiil
It actually makes sense to make another instance of the zone ( just without PvP ) and everyone can run all over the map and see all the houses. I mean it's a massive and nice zone. Not everyone will want to live in the same spot.
You can Roleplay it that the "players" are rebuilding places like Bruma, Cheydenhall ect.
People can build houses around Chorrol...
People can erect villages or towns in the wild...
No other area would make sense.
The thing that will probably happen is everyone gets "a house" in a little field or forest or something, it's the exact same generic house and you just pick a "style" and "background layout" ...