I saw this idea in Highlights (High Five) Magazine, the December 2010 issue. They provided house and store front doors, windows, and signs to make a paper bag neighborhood. B glued the pieces to the front of paper bags and then we stuffed them with newspaper and stapled them closed. It was a fun craft which led to hours of pretend play.
You can make this easily at home without the Highlights Magazine pieces. You could draw, paint, or cut out shapes to create your own paper bag neighborhood. Use things like cars, characters, and animals from your toy box to add to the neighborhood and let the pretend play begin!