It should be a simple thing for a Storyteller to define the places that matter to the action of their games, and sometimes it is. We live in towns and neighborhoods, after all, and we've seen all kinds of places on film. But it's also a simple thing to get lost in the process or to end up doing things that make your players want to run away from your locations - not out of fear, but out of boredom. Literary authors have discussed many aspects of place creation at length because it can be so important - a place can be a character all its own, and not just a backdrop - but their aims are somewhat different than ours. While everyone develops their own methods, there are things that we all need to keep in mind when we shape imaginary places for different players to expand upon and explore.
The easiest pitfall, it seems, is to give too much of a good thing. The devil is in the details because rich and inspiring descriptions are powerful, but they have to be handled carefully. On one hand, you have to remind yourself that you are creating a location for a roleplaying game, not a novel. Reading paragraphs full of descriptive text might work for some groups, but showering players with information that doesn't affect actual gameplay is likely to turn many people off. I once knew a guy who wanted to create his own fantasy world, and he regularly fixated on details that the players were unlikely to care about or encounter. He chased people around, asking what they thought of his map or his ideas for plate tectonics. As a native of the Los Angeles area, I can tell you: people aren't going to care much until the ground starts moving.
The details you choose to share with your group need to be portioned into bearable chunks that invoke images in player's heads. This is a way to keep player attention and garner player curiosity. Maybe the introduction to a neighborhood will highlight the sense of crowding and cramped quarters, with narrow buildings lined right up to the sidewalk, looming over cars as they pass. Perhaps the woman on the front steps gives the PCs a suspicious glare before going inside, and people look around cautiously while walking down the streets. The bars on the windows are only one sign that the inhabitants are paranoid, but going into further detail will only belabor the point.
The details you focus on need to give more than flavor; they also have to matter in some way. In the neighborhood above, the details deliver the theme and mood of the place and hint at the way the PCs will be received. Outsiders encounter a lot of distrust when asking questions, but neighbors aren't given much more quarter. Researching a disappearance might be hard, but by using databases, the PCs might find that an inordinate number of people from that neighborhood are committed to mental health facilities. Those inmates might be more helpful. Or, if the PCs decide to rent a room in the area, they might start to feel as though they're being watched everywhere they go after a few nights of sleeping there.
And in everything that you do, you must remember to leave room for the player characters to exist, influence, and interact. A setting that has all of the characters it needs might make players feel shut out. Likewise, non player characters can become so tightly intertwined that there's no room for the player characters to insert themselves. And a place in which all land and resources are owned and rigidly controlled can take away the feeling that there's something to reach for. So consider the deficiencies and empty rungs on the ladder of your setting, as well.
One last pitfall isn't a problem for everyone, but can make sessions difficult for particular groups. Sometimes a Storyteller introduces a place only to be passed through, with nothing of real interest. That's okay at times but on the whole, your locations are places were people live, struggle, and die. Things happen there whether or not the PCs are involved, but some of those events are going to draw the PCs' attention. It can help keep a game running smoothly to have some story seeds sprinkled through each location, in case the players aren't sure what to do next or want to see what you've come up with.
Some situations are bound to be small, probably revolving around a few characters. The journalist who's trying to blackmail a local wealthy pillar of the community might have that endeavor blow up in his face - and the PCs might be around when it does. Other situations will be major ones and will involve groups, or perhaps wide sections of the city. Perhaps a local criminal syndicate is awaiting a shipment of guns that hasn't arrived, and has sent men out to find it. While people are threatened, tortured, and chased through the city, it remains unclear who took the goods or why. On a larger scale, a natural disaster or onslaught of foul weather will churn up just about any area, and who knows what will go wrong once the floodwaters start flowing? Knowing how terrain and climate can influence a town can give you occasional spice that's quite potent.
One method to come up with distinctive places on the fly is to look around and try to associate an object with a place. It can be as simple as glancing around your computer desk and letting your mind build a story out of something nearby. Keep in mind that just about every object can be given some kind of function, and many are made with a purpose in mind. Those kinds of purposes can be applied to cities, which have functions they may or may not have been designed for. It might sound odd at first but it can be a good way to come up with locations quickly, or to flesh out existing places that aren't developed enough.
For example, in the web comic The Order of the Stick, a city serves as a padlock of sorts, guarding a site of mystical importance. The people in the city are not aware of this function, but the city is affected nonetheless. The place is very lawful good and an elite group of paladins was developed to stand guard. The strip describes this in detail from #273. There are a lot of places that can serve in similar capacities. First, there are cities that could hide and protect places of magical importance, artifacts, and so on. There are also cities that could have, at their heart, secret purposes that very few know about. These purposes can still affect things (and draw in the PCs).
Just about every time I've tried this method, I've come up with something I haven't done before. For instance, a town could be like a picture: static, unchanging, and if anyone tries to change major things about it, horrible penalties arise. A neighborhood could be like a bottle of pills: it's the place where everyone knows they can find the tranquilizers they need, and the locals speak and move slowly. In fact, the locals are known for depression, oversleeping, coma, and dying in their sleep. Or maybe it's just the opposite. Maybe the locals are trading their own rest for profit, so that residents stay up at odd hours working and trying not to go stir-crazy. Eventually, though, high blood pressure and hallucinations consume them.
I feel that the setting of a game - the world, the city - is like water. It provides a context for the characters, it is an element through which they move. All of the characters, NPCs and PCs alike, are held by the setting the way that water carries debris, swimmers and such. The setting impresses itself on the characters in different ways, sometimes like subtle currents and other times like great waves. That's what it's like when the Storyteller introduces stories into the game; whether they're big or small, they become part of the experience. Some of the stories, players can swim around or dive into. Some of them are more likely to happen regardless.
Players can float along a bit because the setting is a living place and some things will come to them, like a current that can carry you a ways if you just relax. Players can also swim on their own, progressing at their own pace, perhaps diving to explore what's below the surface or changing course. In any event, they make an impact simply by being in the water and making choices: they make their own waves and send out their own ripples. NPCs likewise make their own impact. The river keeps flowing and its composition always is changing, like the flow of events going on in the background.
In different ways, the world can be a living thing, developing not only in response to PC actions but independently, as well. Other characters float in the element, making choices about whether to swim away, try to hold onto something or someone, or perhaps to try to drown an enemy. NPCs that hold all the cards take too much away from the PCs, but NPCs without impact can make for a less interesting journey. The PCs are the stars but they do not have to be the only ones who really matter. When we play, we focus on one set of people struggling in the water but we could just as easily pull back and focus our attention on others.