Yeah, I came to the same conclusion. As soon as my village was fully buit and set up with an upgraded forge and ore mine, I started seeing quite a number of items that required me to level up (and several sets of cool samurai armor heh heh)
I mainly found it a little odd that the regular city shops simply stop though. It seems rather limited in forcing dependancy on a few vendors in your village that might offer you the piece of armor you need; provided the randomized item generator gives you the proper items to complete the set...
From my experimentation with the village it seems that in order to increase your amount (and thus chances) of items, you'll need 1.5 forges, the ore mine and 3.5 shops (the .5 one to destroy/rebuild in order for the temporary supervalue of selling stuff) to get a decent selection of goods while still getting a little profit of a few thousand auras per 6 minutes.
In the city nowadays I only run inbetween the two magic vendors to buy gems and nothing else.
Ah well, maybe an expansion could straighten things out eventually