The visit on the pope's final day of his three-country South American tour underscores the theme of his trip, during which he has spoken out repeatedly against poverty, inequality and corruption.
The community of Banado Norte in the capital Asuncion is prone to flooding from a nearby river and many residents ended up there after being displaced by corporate agricultural land buys in other parts of the country.
While Paraguay, a nation of some seven million people, has seen rapid growth in recent years, 40 per cent of the population remains mired in poverty.
"I couldn't be with you without being on your land. Your land," he emphasised.
The pontiff stopped at several homes to visit with and bless families living there.
"I shuddered for a moment and got goose bumps and did not know what to say," said Carmen Sanchez, 50, who had prepared some traditional food.
Neighbour Silvia Sanchez told AFP: "I just hope that after this visit, the government will provide the assistance needed here."
Following his visit, Francis delivered a mass at a nearby military base, where huge crowds had gathered in muddy fields to hear the pontiff.
"It is about turning from the path of selfishness, conflict, division and superiority, and taking instead the path of life, generosity and love," the pope said.
Among the worshippers were Cristina Kirchner, the president of Francis' native Argentina, and Paraguay President Horacio Cartes.
The pope's visit, his ninth trip abroad, has been notable for a number of historical pronouncements.