For me the 'setting' of the story is almost irrelevant. I have stories that are so generically set that I've no clue where they are. Such as the my story "Soldimehndi" set for publication on Sept 15th at Wild Child Publishing. I've attached the story to a particular place, but when it's read, the city it's in isn't even mentioned. Because my stories are almost always about character. So the setting has to be a character in and of itself.
Having said that, the setting derives from where the story is inspired. My straight horror novel "Not All Dreams" is set in a fictionalized version of Carlin, NV - because when I saw the image that started the short story that turned into a huge novel, the image was of a gal walking late at night down a particular stretch of street in Carlin. Plus I could put in the 'character' of the town.
My extended setting for my 'Eagle Ridge' series started in a roundabout way. I wanted to write a short story about a guy who is hounded by a ghost on a dark, rainy night with mist creeping along the ground. I kept thinking of the story as set in a graveyard and it wasn't working. I tried picturing it set in a city park and it didn't work. Finally one day I was driving along the shore of Lake Tahoe and as I went to Incline Village the story suddenly sparked, gelled and the short story has evolved into three novels with a fourth to be written soon.
Then when hiking up in the Columbia River Gorge a few years back, I passed a trail marker that showed the way to a particular set of falls. I immediately had an image of the layout of the larger city, realized how it would work as my own personal version of "Newburg" and how it accomplished everything I wanted in a particular setting. So my third setting was created. Including a limited history of the town.
So, I'd say don't sweat the setting, it'll come out in the story. Sweat the stuff that's most important. But always remember that the setting is the foundation of believability. Setting a 'wizard' story on a space station is a tough sell...as is a Sherlock Holmes mystery in Bupkus, Minnesota. Do what's right for the story and the setting will seem invisible, as it should.
Rabe...