With a little help from Wikipedia, let’s start with the history of Christmas villages:
The tradition of decorative Christmas villages is rooted in the holiday traditions of the Pennsylvania Dutch. In early-colonial American Moravian homes, the construction of a nativity scene or “putz” at the base of a Christmas tree was a very common holiday activity. The term “putz” was derived from the German verb “putzen”, which means “to clean” or “to decorate.” These nativity scenes soon became very elaborate and often included sawdust or fine dirt spread to represent roads leading to the manger, stones and fresh moss to represent grottos or caves, and sticks and branches to represent miniature trees. These details were in addition to the carved wooden figures which represented the Holy Family, animals, shepherds, and other traditional nativity figures.
Although initially placed beneath the Christmas tree, by the early 1800s, a family’s “putz” might have also been found on the fireplace mantel, side tables, and other prominent places within the home. These expanded scenes might include other stories from the Bible. The story of Noah’s Ark, an especially popular subject for a “putz”, could result in the arranging of several hundred carved animals winding their way towards the ark.
By the mid-19th century, more secular figures and scene elements were being added to the “putz.” In many homes, the “putz” took more time and energy than the decoration of the family Christmas tree. Separate areas were developed with different themes. Spreading outward from the Nativity scene were other farms or village scenes which had a way of growing larger and more elaborate every year. Eventually, toy trains were added to these miniature worlds.
After World War II, several Japanese companies started mass-producing cardboard or paper houses, churches, and other buildings. These small buildings usually had holes in the back or the bottom through which Christmas lights were placed to provide illumination. The buildings had tiny, colored cellophane windows and were decorated with mica-dusted roofs to give the appearance of snow. Since these buildings were made of inexpensive material and were widely available throughout the United States, they became a very popular Christmas decoration.
In the 1970s, ceramic or porcelain Christmas villages were introduced and started to become popular. Department 56 was one of the first companies to make these buildings and remains the most popular. Other companies, such as Lemax, have also produced similar villages. There are numerous other brands sold. Drugstores and dollar stores now often carry much smaller buildings which are typically not as well-painted. Unpainted buildings are also sometimes available at craft stores.