There's no need to house rule this — you just need to start enforcing its restrictions. Allow me to draw your attention to its area of effect:

4 square″ + 1″ square/level

(Aside, this is taken from PHB page 95, since the Illusionist version of the spell has different range and area of effect.)

These are table inches, which we could convert to feet/yards, but the following will be simpler if we just compare table inches directly with fireball's numbers.

A fireball has a radius of 2″. Let us ask then, “what level would an illusionist have to be to cast a phantasmal force large enough to contain a 2″ radius sphere?” Let's make a first-order approximation using the minimum number of 1″ squares necessary to create an area in which the image of the sphere could appear. The area of effect of fireball is three-dimensional, but the area of effect of phantasmal force is two-dimensional, which presents an odd issue. However, phantasmal force is described as being able to create images “within the boundaries”, so let's be as generous as the spell seems to be intended, and say that the vertical space it can create the illusion within is “good enough” for our purposes and we just need the footprint of the illusory fireball to fit inside the phantasmal force's area of effect.

We'll assume as a first-order approximation that each 1 square″ of area of effect can't be divided, so they have to be tiled as whole square table inches. Inscribing a 4-unit sphere's footprint (a circle) inside a pixelized shape requires a 4×4 square of squares, or 16 tiled squares.

So, as a first approximation, an illusionist needs to have 16 square table-inches of area of effect to play with to be able to make a phantasm of a full fireball. That requires being level 12 to pull off.

But maybe you think tiled squares aren't generous enough. Let's allow the table-inch squares of area of effect of the phantasmal force to be subdivided infinitesimally so that the area can be a cylinder that just barely contains the footprint of an illusory fireball and see where that gets us. (Some DMs might reject this move since the area of effect is given in squares and they may require a straight-edged area of effect, but some others might allow it with the reasoning that it's fine as long as the final area matches regardless of shape.)

A 2-unit-radius sphere has an area through its widest point of just over 12½ units, rounding up to 13 square″ required. So even being super-generous, it would still take an illusionist of level 9 to use phantasmal force to create an illusory fireball.

Clearly, creating illusions of fireballs with phantasmal force isn't something that your players should be doing at first level, or even 5th level when their magic-user friends are starting to throw real fireballs.

Conclusion: You don't need to house rule, just give the players a reality check

So, there you have it: you don't need to house rule this at all, you just need to pay proper attention to the relatively small area of effect, and break the news to your players that you've been accidentally letting them create a 9^th-level illusionist's phantasmal forces before they were actually 9th level, and won't be doing that any longer.

If they are 9th- or 12th-level, then this isn't overpowered at all, because they have access to equally (or more) powerful effects already and cleverly using their resources like this should be letting them paste low-HD enemies by the truckload. So again, there simply isn't a problem if the area of effect is enforced.

Addendum: Don't overlook the audio limitation either

The above is all completely ignoring the impact of the stipulation that a phantasmal force is silent. Is a fireball silent? Not at all. An illusory fireball with no sound effects is not very convincing, and unlikely to fool even stupid opponents, even stupid opponents who have already been hit by a real fireball. In fact, having just experience a real one with all the sound and fury of real fire, they'd be more likely to notice that a silent one is not quite right.

First of all: Welcome to DMing! It can be super fun and rewarding, and I hope you enjoy it.

One of the things that most DMs learn when they're playing a game that works like 5e is that you don't always have to follow the rules. If it would improve your game, you can totally rewrite or ignore parts of the rules. This is usually referred to as Rule 0, and it can help you out a lot here.

It sound like you have 3 goals:

• Initially, trick your players into thinking that the city is functional.
• Allow your players to figure out, over time, that the city isn't actually functional.
• Set up your Big Bad Evil Person as a powerful spellcaster.

It's totally allowable to say that the Big Bad Evil Person has access to some kind of powerful illusory ritual that lets him cover the city, and helps you with these goals. The way that I'd run it is this:

The Big Bad Evil Person knows the ancient ritual, Illusory City. This ritual is more powerful than most spells, and takes lots of time and special materials to perform. It covers a mostly-intact city with an illusion that makes it seem like it's whole, as long as the buildings are mostly standing. Any designated creatures in the city when the spell is cast are also covered in this illusion, and will look like average citizens of their size. For example, a zombie could look like a bartender, but wouldn't gain the ability to speak or tend bar, but a vampire would no longer look deathly. A Detect Magic spell cast within the city will detect a vague aura of illusion magic, but won't reveal that everything in the city is covered in an illusion. This applies to any Detect effect in the area; a Paladin using Divine Sense would detect that there's undead in the area, but wouldn't be able to pinpoint the number of sources, or their location.

This is still just an illusion, so anyone touching an object, creature, or building affected can make an Intelligence (Investigation) check (DC 20) to figure out that it has an illusion on it, but this doesn't dispel the illusion, or let the character see through it.

This spell description aids the first goal by making it non-trivial to figure out that the city is an illusion. If they cast Detect Magic, they get valuable information; namely that something super weird is going on. :) It serves the second by allowing several ways to discover the illusion: touching something an a check, or interacting with a non-intelligent undead "citizen". You could also maybe let the characters smell the rotting corpses, without telling them exactly where the smell comes from. This description also serves the third goal, because it's a kind of magic clearly out of the scope of what the players can do.

By using a homebrew spell like this, with clearly defined rules and ways to interact with it, you can make up something that fits your design goals while avoiding handwaving away the player's abilities.