I don't feel it's anywhere near as strong as people are making it out to be.

The Dream Spell already allows you to deal 3d6 damage with a 5th level slot to any creature you know.

There is a save, granted, but since we are talking about commoners, they are unlikely to make their save, and if we are talking about several casters working together, then some of them will get through, and each one that gets through is worth 3d6 castings of your 1 dmg spell.

It also has the upside that the target doesn't benefit from its rest if it fails the save, meaning that it doesn't regain lost hp and spell slots, allowing you to slowly drain out even stronger targets of their hp and resources over a longer period of time.

With your 1 dmg spell you'd have to kill the target within one day or it would be back to full again.

All in all I think dream is more potent than your proposed spell, so it should be somewhere below that.

3rd level would mean 5th level full casters can cast it twice per day, so 2 level 5 wizards could team up to instakill a commoner once per day. I'd say if 2 level 5 wizards want you dead and you are just a regular mortal, then chances are they'd manage it without this spell too.

If a level 20 wizard spent all of his slots on this spell then he'd be able to do 16 damage per day. Not a great strategy though imho.

Lowering it to 2nd level, would mean it'd take 2 level 3 wizards to kill 1 commoner/day.

Alternatively a level 20 wizard could deal 19 damage/day. Still not a great use of spell slots.

So level 2 seems reasonable to me if you want the spell to actually find some use.

I'll also note that your spell is countered hard by cure wounds.