Actually, I should call the tools "content development tools" rather than mod tools to avoid confusion. You'll not be able to modify hard-coded things but rather write new content.
Adding new items, NPCs, dialogs, factions, towns, party types, etc.. are the main things you'll be able to do. But changing the game dynamics will not be really possible.
As to your questions:
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Will we be able to create/edit towns and the landscape easily? YES
Will we be able to edit what certain shops sell and buy? TO SOME EXTENT
Will we be able to add factions? SURE
Will I be able to add in a new type of horse/weapon/etc as long as I reuse some of the existing art? YES. YOU CAN ADD NEW ARTWORK AS WELL
Will I be able to change the upgrade paths and add new unit types there? YES
Will I be able to reshape the world, adding in more factions and quests, adding in a wide range of tournaments with quest and story implications? CERTAINLY.
Will I be able to add more complicated exchanges between the various factions when they meet on the battle field? NOT SURE WHAT YOU MEAN HERE, BUT PROBABLY NO.
Will I be able to make rescuing a group give me faction with that group? YES
Will I be able to make it so that a fully upgraded farmer becomes a level 15 hero? NOT REALLY.