It seems that every preference one has is stored under the home directory. It gets pretty full, and difficult to navigate though if you are looking your stuff. this is why I have all my stuff under a main folder, which then everything else goes under that except system stuff.

Now my question is, if I created a directory, say I called it preferences, and I moved all those system files over, would I have to update every single application as to where it needs to look for that file, or does the Linux OS actually require these files in their place, whether or not you could update various links?

Most programs in linux look for their configurations in at least two places.
First it looks in your home directory for the files.
If not found it looks somewhere in /etc directory to find the global configurations for that program.

That + note some apps have their paths built at compile-time. Also standarization & packaging (deb/rpm) will expect the conf files to live in ~/, /etc or /usr/local/etc, there's a (not mandatory) agreement to standarize file locations formerly called FSSTND (dunno what its called now).

Tho no one can deny u the right to rightfully fsck up ure own file locations :-]