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

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

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.

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.

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. 

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.

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.

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

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.