So there's the first problem. If you came here to play an empire building game, then FE won't meet your expectations. FE is more a of hybrid, but as an "empire builder" you'll recognize that there are warmongering empire builders out there who don't like tedious cleanup when they're rolling through the end game. It is these gamers that Stardock thankfully created a mechanic so that the AI won't be able to rebuild as you begin to raze all their cities.
The mechanic is fine. Leave it in. Someone one said there is a spell that can restore land. If so, choose that magic combination and have fun!
That is a big call. And even assuming you are correct I didn't say that FE had to be an empire building game, I said I was an empire building player. I prefer to build up my empire (and my heroes in FE since heroes can be built up in a similar way) and then crush my enemies. With the current AI I could almost always crush my opponents faster by going all out war and making more short term build choices, but that is not my preference. I think you will find there are a moderate number of people like that in the 4X genre. I believe Stardock are also at least partially targeting such people, otherwise it makes little sense for them to have put as much effort as they have into city building options in the recent beta's.
I agree it might be frustrating for warmonger type players to have the AI constantly resettling on land that has already been razed but there are other ways to deal with this. Land could be made temporarily blighted and require a moderate investment in mana, gold or similar to be rejuvenated. This would make it difficult for the AI to instantly rebuild but make it possible for a determined player to do so.
They could also change it so that victorious monsters do damage to a city based on their power so a damaged bear might only kill 30 people or 1 building, while a Felldrake (name?) might destroy a level 3 city. When a human player razes the city it would count as being destroyed obviously (I would still want to be able to rejuvenate the land though even in the latter cases).
Instead of simply removing all tile yields, perhaps Stardock would consider reducing their power in the vicinity? Change the terrain to "ruined city", put some cool graphics on it, and give it mediocre tile yields.
I can see your point but personally this would have similar problems to me as the current situation unless there was a way to restore the ground to full yield. If your prime 3/4/2 town that you settled recently gets destroyed by some wandering creature you didn't notice and is now reduced to 2/4/1 or similar then it is still a pretty major downer and still a major temptation to turn the game off or reload. Have a penalty by all means but let it be fixable by a determined player.
BTW I feel the same way about heroes, wounds are great, but it should be possible to remove one wound by say 100 turns of having regeneration active, or a level 4 life spell costing 200 mana, or a level 5 death spell turning the unit into an undead hero, fixing all wounds and increasing their strength by 20 but reducing their healing per turn in half, with subsequent casts also reducing their rate of experience gain by 5%, etc. There is lots of potential here if the engine can handle it!