Use adjustment layers and filters to create a fairytale scene
Open your forest image and go to Image>Auto Tone (Cmd/Ctrl+Shift+L). If the image is still a little bit greenish, correct this by going to Image>Adjustments>Match Colour. In the dialog box check the Neutralize box and hit OK.
Head to Windows>Channel. Hold Cmd/Ctrl and click the RGB channel thumbnail to select it. Now press F7 and hit Cmd/Ctrl+J to duplicate the selected area. Name it Luminosity, open the Levels (Cmd/Ctrl+L). Set the highlight input to 155.
Head to File>Place and add a house to the picture. Go to Filter>Liquify, set the brush Density to 100 and push the corners outwards to create a fancy distortion. Grab the Liquify Smooth tool (E) to smooth out any irregular shapes.
Resize the image and place it over the rocks. Go to Layer>Layer Mask>Reveal All. Grab the Brush tool (B), choose a soft tip brush, size 60, and paint around the bottom to create a smooth transition between the house and the rocks.
Let’s create the shadows and lighting effect using the adjustment layer. Go to Layer>New Adjustment Layer>Hue/Saturation. In the dialog box check ‘Use previous layer to create clipping mask’ and then hit OK. Set Lightness to -70.
Grab the Brush (B) and choose a small, soft brush. Set Foreground colour to black. Select the adjustment layer mask and paint over the windows and ceiling to create the light effect (use different brush sizes and vary the pressure). Repeat the last steps to each house.
Enhance the composition by placing more images around the houses. Go to File>Place and place tree trunk stumps; move on top the Luminosity layer. Hit Cmd/Ctrl+T to resize. Create a new Levels adjustment layer and drag the sliders to improve the contrast.
Now place mushroom and tree images into the picture, resizing them as you go, around the houses in the image. Go to Layer>Rasterize>Smart Object. Grab the Dodge/Burn tool (O), change the Range to midtones, set Exposure to 25% and add the shadows and highlights on the mushrooms. Hit Cmd/Ctrl+U, descrease the saturation to -20 and click OK.
Click the top layer and hit Cmd/Ctrl+Opt/Alt+Shift+E to create a snapshot. Name it Reflection. Go to Edit>Transform>Flip Vertical. Drag the layer on top of the Luminosity layer. Turn off the Reflection layer by clicking the eye icon in the Layers palette.
Grab the Lasso tool (L) and trace a selection following the bank of the river on the Forest layer. Turn on the Reflection layer and keep it selected. Create a layer mask. To enhance the effect, apply the Gaussian Blur and the ZigZag Distort filter.
Create a new layer, name it Light Rays and fill it with black. Change the blend mode to Screen. Grab the Brush tool (B). Choose a hard tip brush, set the Foreground colour to white and draw random strokes over the area with strong luminosity.
Go to Filter>Blur>Radial Blur. Set the Amount to 100, Blur Method to zoom, Quality to Best, and move the Blur Center to the top-right corner. Click OK. Hit Cmd/Ctrl+F to re-apply the effect. Now open the Levels (Cmd/Ctrl+L) and drag the highlight input slider to make the light rays more visible.
Create a new adjustment layer on top of the layer stack. Go to Layer>New Adjustment Layer>Photo Filter. Choose Yellow and increase the Density to 80%. Grab the Brush tool and hit F5. Open the Brush Presets and choose Load Brushes. Find a smoke brush online or on the FileSilo and click Load. Paint the smoke.