"We are more interested in seeing smaller towns... Beer, Wine, food. I don't have a lot of interest in Munich just because it is a large city."
Makes sense to me. 3 days in Berlin, then see some small towns.
"Thinking about heading down to Nuremberg through Dresden. Maybe stay there for a 3-4 days and take day trips out of there. "Any suggestions on where to stay in Nuremberg?"
Huh? Both cities have populations around half a million. Same with Leipzig. Like Munich and Berlin they too were mostly demolished in WW II and rebuilt into modern metropolises; some attention was used to make some of the rebuilding historically authentic of course, but these are still very large places. And they're bad places to have a car unless you value traffic and parking fees at your hotel.
What I think you need to do is familiarize yourself with some smaller places and decide which ones would be interesting and doable on the route you have in mind.
Here's Herleshausen, a town of farm folks that about 30 years ago straddled the Iron Curtain. DW and I spent 4 nights there last spring and day-tripped by train to nearby towns of interest in the area (Eisenach, Mühlhausen, Erfurt, Schmalkalden, Bad Langensalza.) It was fun. I'm not suggesting that Herleshausen or any town of 3,000 is right for you - we have our own personal preferences - I only wish to emphasize that there's no need for you to bed down in impersonal hotels in these huge cities if you don't wish to be there. You will find rooms at small inns, private B&Bs, farms, and Grandma-apartments everywhere in Germany - in tiny villages, small-to-large towns, and small cities. In our case we had a roof-space apartment with a large living room, bath, kitchen and one bedroom in a 3-story home in town. Oh, and a view across rooftops and a nice meadow toward the castle ruins on a nearby hillside. We booked it through the regional tourist office website linked above.
If you want to stay in the general Nuremberg area, look into small towns like Iphofen, Bad Windsheim, Marktbreit, or smallish cities like Bayreuth (70k) Bamberg (80k) or Kitzingen (20k)
But you could literally toss a dart at a map of Germany and find lovely small towns. A Berlin - Rhine - Paris routing might take you through Goslar and/or Hannoversch Münden before you reach the Middle Rhine Valley, where places like Braubach, the home of Marksburg Castle, are in great number. The entire Rhine/Mosel region is filled with small towns in scenic places. You can have a look at some of the Rhine/Mosel options at Bavaria Ben's website, where you'll find a collection of very readable reports and reviews from independent travelers.