An inherent advantage of the fantasy genre is that it offers a dazzling diversity of settings. Some fantasy is set in alternate versions of the historical past, in which the magic of folklore is real. For example, Orson Scott Card's Alvin Maker series, beginning with Seventh Son, is set on an American frontier where a baby's caul has protective power. Other stories take place in imaginary worlds populated by folkloric characters. The map in the front of The Ill-Made Mute by Cecilia Dart-Thornton bears no clear relationship to any place on Earth, and ships and horses fly across the sky, but its wights, both seelie and unseelie, were meticulously researched from the folklore of the British Isles.
Such fantasy settings free the author from the constraints of the "real world." Want your heros to have to find their way over or through a precipitous mountain range? Draw the Misty Mountains down the middle of your map. Want a dragon to show up, breathing fire and speaking in riddles? Name him Smaug and start writing. (Actually, don't. The Misty Mountains and Smaug are Tolkien's, but you get the idea.)
So, with such freedom available, why do some authors opt for the constraints of the here and now? What are the advantages--and pitfalls--of writing the fantastic into our own backyards?
World Building and Research.
Fantasy in which the adventurers encounter one damn amazing thing after another isn't as engaging as adventurers struggling to survive in a world with its own internal logic or ecology.
If Jon slays a witch in the middle of the wilderness, and no one hears her fall, there aren't any consequences for Jon.
On the other hand, if Jon slays Morgawse, who happens to be the mother of King Arthur and of his son Mordred, not to mention a political force in her own right as ruler of Orkney, Jon must deal with political and emotional fallout. If he hides his deed, he must worry about discovery; if he flees to France and from there across Europe to the Holy Land, he'll have adventures along the way; if he sticks around and boasts of his prowess, he earns Mordred's wrath and puts Arthur in a difficult spot.
Interesting plot developments! Lots of opportunity for character development! However, to make the story work, you'd better research both legendary and historical Britain with as much care as you'd take honing Excalibur. Otherwise, your setting will strike so many false notes, your readers won't be able to settle into enjoying the plot and characters. The same applies if you set a similar story in a place that never existed, except instead of researching the setting, you'll have to create it.
When you set a story in your hometown, on the other hand, you already know how people make their livelihoods, what they eat, how they worship, and what their family relationships look like. You know how young people rebel, who's considered an outsider, and which people and institutions have power. You know what houses, roads, and grocery stores look like, and you know what people wear and do for fun and the functional literacy rate. Just by living, you've done a lot of the research for your story already. Plus, your readers know much of the landscape, too, so you have much less explaining to do.
Caution. In an essay in the winter 1997 issue of Weird Tales, noted horror scholar and critic S.T. Joshi held Poppy Z. Brite in contempt of geography, because her story, "Xenophobia," has the protagonists find Manhattan's Chinatown around the corner from the porn district. Don't let this happen to you! When we write a story set in New York, or London, or Nairobi, we need to know our stuff. In an historical fantasy, a few history buffs will notice the errors ("Nobles didn't wear pants during the French Revolution.") In a world of one's own creation, a few detail-oriented readers will nitpick internal discrepancies ("On page 11 the healing herbs are white, but on page 121 they're pink.")
A modern setting may come easily to us, but the standard for accuracy is higher as well. Looking at a map, reading travel guides, watching movies shot on location, and relying on a memory of a visit several years ago are not, for most of us, good enough research techniques for contemporary fantasy. If you find yourself relying on these techniques, you should consider setting your story somewhere that doesn't really exist, so that getting every detail right won't be as important.
If your characters will drive through this place, then drive it; if they will walk, then walk it. If you're working on a novel, don't live in the setting, and can't travel to scope the area regularly over the duration of your writing process, then have someone, or several someones, whom you can quiz about nitpicky details. What time in the morning does the fog usually lift in April? Where would kids find a patch of woods to explore? What's the traffic like on Main Street on Sunday afternoon?
Wonderful fantasy stories have been written about magicians' apprentices who avenge their teachers' deaths and about peasants who become warriors. In modern settings, the budding mage may start as a chemistry major at the local college, and the warrior-in-training may begin as a middle-aged paralegal who signs up for a self-defense class at the Y. In other words, the characters could be our neighbors. Just as it's exciting to meet people who lived long ago and/or far away, so too when we imagine that the twenty-something slacker in the apartment down the hall is actually an elf slumming among humans. Pretending that magical forces operate at the same grocery stores we shop at, visit the same clubs, or farm the same land gives a neat twist to our everyday surroundings.
Caution. Would you write that Thudclobber is a mighty-thewed barbarian and consider your job done? Let's hope our characterizations are deeper than that! Same goes for modern characters. We're not writing mainstream, so we won't spend an entire story showing our characters' neuroses and limitations. However, our characterization should still run deeper than "Sally, the alcoholic hooker with fading good looks." Just as with the location, a fair percentage of your readers will actually know people like the ones in your story. To write them accurately, you need to know them, too.
When the X-Files was still new and shiny, one of the show's most gripping elements was its juxtaposition of the fantastic against an utterly normal backdrop. The show cast a diverse array of ordinary-looking people as characters who had jobs, families, and ordinary-looking wardrobes and homes. Stories were set in suburban homes and seedy apartments, lumber camps and office buildings, hospitals and schools, airports and train depots, synagogues and churches and cemeteries. But everything was not exactly normal. We'd experience the tension between Scully (There has to be a mundane explanation.) and Mulder (Gotta be aliens or monsters.), and we'd see the contrast between the ordinary and the weird.
In one scene, Scully buys groceries--a few staple items that a single woman who works long hours and travels a lot would buy--and the bar code scanner goes nuts, tipping her off to an alien implant. That scene gave me goosebumps. Contrasting the bizarre with the ordinary can move the reader to the edge of their seat.
Caution. Beware the credibility gap. Or, does the reader believe Mulder or Scully? If frogs rain down ... well, it could indicate the operation of witchcraft, but it is a documented fact that frogs sometimes get picked up and dropped by storms. If, on the other hand, giant toads drop in by parachute and start eating people, someone's going to remark the unearthly nature of the event. When fantastic elements are too subtle, then the narrator's sanity comes into question. Jeff can't convince his roomate that goblins lurk in the basement, and frankly, he can't convince the readers, either; pipes do make strange noises. If the fantastic elements are too explicit, then we begin to wonder why anybody lives in a goblin-infested building and why no one's home video has made the evening news.
Subtle magic may work best in a place rife with enchantments, where any reasonable person would believe that noises in the basement were due to goblins. In the same way, explicit magic may work best where all buildings have goblins, and they only become an issue for Jeff because he's a light sleeper.
Think about how you want magic to work in your story and decide if it will be believable in a modern setting. While contemporary settings allow us great fun in playing off of expectations--our readers think they know how this world works, after all--we need to be careful how we breach those expectations. Both too little and too much magic are hard for readers to swallow.
A number of authors have produced critical and commercial successes in the field of contemporary fantasy. F. Paul Wilson, Stephen King, and Ray Bradbury come to mind immediately. I especially enjoy reading Emma Bull's War for the Oaks, set in my own hometown of Minneapolis/St. Paul. One of the masters is Charles de Lint, who has set stories in Ontario, Canada; in the west country of England; and in the make-believe city of Newford, which is a lot like Ontario with bits of other cities thrown in. You can find de Lint's discussion of why he sets tales where he does at https://www.sfsite.com/charlesdelint/.
Ask yourself if your tale benefits from the immediacy of a contemporary setting, or if it needs to happen in a more distant, mythic place. Then, wherever you set the piece, write strong characters and a well-paced plot in creditable prose, because no setting, no matter how cool, will make a poorly constructed story entertaining.