Settling--Do I have this right?

You are correct.  You need to make outposts to gather the resources in uninhabitable locations.

That's not good.  The game is telling me exactly where I need to place cities, leaving me very little strategic choice.

So outposts gather the resources?  Can I connect the outpost to a city, so the city gets the benefits?  Or are all resources global?

No, game is telling you where you CAN place a city, not that you HAVE to place it there.  

So my choice is to place my cities where the game tells me to, or to keep one city throughout the entire game.  Not much of a choice.  

Has this never come up before?

The game is in a post apocalyptic world and most of the ground is not suitable for placing a city to have a populous to suvive.

The game doesn't tell you that you must settle in this spot, usually there are several spots to choose from and depending on the map you can have a lot of choices. In fact you can have rather large sections of choices for a city. But you also can't have cities too close to each other needs to be at least 6 tiles apart. So you can find a large spot to settle. There is good settling in the middle that will get rid of all other options. But you could choose to have 2 cities with sub-optimal locations.

It is nothing that I think is bad in this game and I actually prefer this system than the ability to place a city anywhere I like even if it makes no sense that a city should be able to survive in that location.

There is also the possiblity of changing things so you could settle everywhere you like, but you would have bonuses like 2 grain and 2 production and the only spots that show up have a bonus sum of 6, everything else doesn't show up unless it meets this threshold number.

There are multiple sites throughout the game where you can build cities.  Just because there is land suitable for a city does not mean you have to settle there, settle at a different location.  Granted there are only a select few areas that are able to support a city, but there's nothing that says you have to settle each and every one of them.  It's similiar to any game of this type.  Even the Civilization games have limited places where you can settle a city.

Civ works nothing like this.  I can pack cities in pretty tightly in Civ.  In my last game of FE, after my initial city, there was one small spot about 20 tiles to the south east, and one small spot about 20 tiles to the west, with nothing in between.  My city placement choices were very very limited.  Is there maybe a tech that can be researched that makes this land usable later?  Maybe all land tiles should settle-able, but some are more valuable to build on than others.  then at least we would have options.

My last game I had 5 cities within 20 tiles of my main city. The map is random and depending on the settings you choose could also depend on the city placement.

I've also had another game where within 40 tiles I could only settle 3 spots (but I had the settings on barren for that one). Set the map on temperate and see if that provides enough places to settle.

It did, actually there was a time you could put your city whenever you wanted. It led to unlimited city spam where entire map was basically covered in cities. Speaking for myself, I like it the way it was solved. 

The tech Third Book of the Magi unlocks a spell that does this, but the effect is not guaranteed.

I'll try setting the map on temperate.  thanks!

**I believe I had my map set on random before, so maybe the game with the sparse city areas was because it was barren.

This is by design. They stated that they wished to avoid "City Spam". So instead you are facing a decision if  you go to war over an area, or let it go.

Personally I love the fact you cannot place cities all over.

Outposts only extends your empire borders. It automatically gets linked up to the closest city. Any resources within its borders will be linked to the closest city. The building/upgrading of the resource node will go in the build queue of that city as well as any upgrade to the outpost itself.

After more thought, I'm starting to be okay with this.  It's kind of like the setting in Galciv2 where you can choose how abundant colonizable planets are.  

Yeah see the upside is, the less habitable the world is, the more the AI players are going to struggle too.

I actually have started setting the resources to sparse.  My first two cities were pretty close to together, but my third city was really far away.  Even with roads it took two turns riding on a horse to get between the two.  My fourth city was even farther.  Three or four turns for my Juggernaut created in my second city to get to the fourth city where all the fighting was.

This last game I might have just been unlucky though.  Tarth had three of four big cities clustered pretty close together.  Although I think Tuidjy has a thread where AIs are just settling cities anywhere.

There are a couple of mods in the Modding section which makes the fertile land a little more accessible, and a little more... fertile, for lack of a better word.  I like playing this way more - I think SD took it a little too far - often, even on fertile, the random map will put some faction on a plot of fertile land where the next spot is behind a vsat tract of water & mountains as is not only very far away, but inhabited by monster sure to squash them.