Mkay, recently observed the building of one of those fancy dollhouse kits and the price, time, necessary supplies, and so on didn't appear to equal much fun. The pieces in the kit weren't even cut right.
On the good side there are good 1/6 houses to be found. The Kid Craft and other similar brands they sell at Toys R Us and online do great. Check Sears and Finger Hut too. The walls are washable mason board which could be painted. I have two of the same house but with slightly different decor, one was found at a thrift shop and the other on Craig's List.
It's the same house, the dolls are 1/6, and the stuff comes from all over.
As for making stuff get some good how too books and some polymer clay if the kids are old enough not to eat it. Angie Scar has some terrific miniature food books.