Residential Zones are the buildings in Simcity simulation where sims live.
In Simcity SNES
In the SNES version of Simcity, much like the other simcity games, residential zones are a fixed 3x3 size. However they can sometimes combine with a second adjacent 3x3 residential zone to "cap out".
On occasion, a Residential Zone can turn into either a Hospital, or a school. When this occurs the Residential Zone is effectively de-zoned, and the special building that replaces it has no major affect, equally however it cannot reduce in size.
Residential zones are required for the simulation to progress, as the core gameplay around the game is the balance between Residential, Industrial and commercial zones.
In addition, certain special buildings such as the Zoo and Amusement Park and will unlock as your residential population increases.