But the bigger problem for me is that the FIRST LEVEL of a city is unreachable unless you build extra housing. That just doesn't seem reasonable to me.

  I think I figured it out.  You can only use 2 2x2 squares for a lvl 1 town, and you need 2 hovels to be able to grow to the next size town.  This means if you build 2 large improvements, like a mine and farm, your town will never grow. But if you build 4 hovels, you will grow 2 town sizes fairly quickly.

  Any idea how many inns per town are optimal?

There is another problem with this. When you hover over the city you see something like that:

Max. city size: 30
City size: 31
Citizens per turn: 1
Turns to advance: 19

I marked the buggy/confusing pieces of info. If your city maximum size is 30, it should never be higher, period. If you can't reach a next city level, then you should be notified that you will never do it, if you don't build more houses.