Now go to the building with the green roof to the left of the north-most house. It used to be the hideout of a gang of thieves who had a leader named Blind who hated the light. This ends up being important later on in the game. Go downstairs. Here you find a puzzle where you can get some chests. Start by moving the block north of the rightmost chest downward. Then move the block that was next to that one to the left. This allows you to get the rupees in the chest third from the left. Now move the block on the right of the top row downward, the block that was right next to it move it to the left. Move down past the chest and move the block in front of you down. Now go move the block two spaces to your left, to the south. Move the block next to it to the right. You can now open the other three chests. All of them contain rupees. Use a bomb on the cracked wall to the right of the stairs. It will look a little different than the rest of the wall. Inside you find a bunch of jars and a chest that has a heart piece!
The house south of the cave where the bomb and heart piece were has a girl in blue pacing back and forth in front of the door. She is one of the two NPC's who yell for soldiers, so try to avoid her. If either of these women yell for guards they run into their houses and lock them. Defeat the guard that shows up and then the game returns to normal. Try to go inside her house without her seeing you. Inside there is a Cucco under a jar. If you return here after getting the Magic Powder you can use it on that Cucco to turn it into a girl who looks just like the girl in blue outside. She tells you to not pick on the Cuccos. Go to the right to find a merchant. He will sell you a Bottle! Be sure to buy it, you want to get all 4 of the Bottles in the game. It costs 100 rupees but it is worth it. There are a couple of other cool secrets involving him that I will mention later on, after The Eastern Palace.
To the far right in the top row of houses you find the other NPC that yells for guards. She is wearing yellow and just like the other girl, this one also paces back and forth in front of her house. Go inside her house without her seeing you. Inside at the north wall there is a painting of a guy who looks kind of like Mario on the wall. Go up to the painting and try to pull it off the wall, hold down A and press down on the direction buttons. This is the same method of button pressing you used to pull that switch in Hyrule Castle's Basement right before the Sanctuary. You cannot pull the painting off the wall but rupees come out of the wall.
Exit that house and go south. The house with tons of foliage in front of it has a guy inside who tells you about the Zoras and a treasure they have. Go to the large building south of this. Enter through the back entrance of the large building. Inside is a chest with your second of four Bottles!
Now go back out the way you came. You might find a man wearing all red. He will run away and you cannot keep up with him without the Pegasus Boots. The lady sweeping the yard by him can be turned into a fairy if you have the Magic Powder. Inside her house are more Cuccos and a cracked wall to the right. Use a bomb on that wall to get into a hidden room with a treasure chest containing Arrows. Without the Bow you cannot use them yet though. South of the running man and the sweeping lady you will find a blue haired boy. Talk to him and he will mark on your map where the elder you needed to speak to is. The house next to him is a shop. Buy more bombs if you ran out. You can buy a Life Medicine potion here also but a better alternative is available, which I will cover when we get there. Now go to the house to the right of where the running man was. The guy inside is sick but he gives you a Bug Catching Net!