"It felt fake, like window dressing, a facade to hid that there was nothing there."
Thats beautiful! Your so poetic! I love how you describe that, it explains it in a nutshell.
Ultimately, in any video game, it's all "window dressing", and there really IS "nothing there", other than a bunch of computer code and pixels on a monitor. The goal of the creator (in this case, the developers, artists, programmers, etc.) is to conceal that fact.
In Morrowind, the NPCs were relatively static, either standing there 24/7 rooted in place, or pacing back and forth across the same small patch of pixels that pass for carpet or cobblestone, etc. The setting was generally laid out in exquisite detail to make it look "active", even though nothing was actually happening. In Oblivion, the NPCs had, schedules, did rudimentary animated "activities" (like swirling a potion bottle and sipping it, constantly over and over), and talked about their occupations, but the layout felt sterile and forced (even when the "clutter" wasn't flying across the room due to the questionable application of "physics"). In Oblivion, the tools and techniques were very obviously much more advanced, but in my opinion Morrowind used the limited resources it had to better effect. In the later game, the artistic vision and "TLC" took a back seat to the technology. If TES IV was as "rushed" as it appears, then many of the problems become understandable, if not "excusable". In that case, there simply wasn't enough time (or at least the time was not properly allocated) to turn a "playable game" into a "living, breathing world".
While I don't want to wait another 2 years for TES V, that's far preferable to getting something dumped on us that's barely playable, and then having to wait another 4-6 years for the next game in the series, in hopes that they'll get it right THEN.