You didn't miss anything; they never say what's going on. Which I suppose is appropriate--the game it's based on never really tells you what's going on, either. But I have a theory.
Spoiler:
Remember when the heroine and her husband pass each other in the hospital? They can't see each other, because the husband is in plain old Silent Hill, while the heroine is stuck in otherworld Silent Hill, where Alyssa is in control. Seems to me that Rose never manages to escape from that Silent Hill--Alyssa, who has entered Sharon, and might not be able to exist in the "real world," somehow drags the "otherworld Silent Hill" world with her. At least that's my theory. You'll remember that when she goes home, it still doesn't look like the real world--every things sort of washed out.