002
I've done a bit of digging - and by digging, I mean talking to people and skulking around being nosey - and there are two main things I've encountered that could explain the weirdness of this place.
1. A spiritual leech. Leeches are just what they sound like. They attach themselves to a person or place or object, and use it to help them feed at the expense of their host or of living things around their host. Their victims may feel a general sense of malaise or fatigue, or they could even be oblivious to their own victimhood, depending on what the leech is feeding on (their souls, their vitae, heck, some leeches even feed upon disease). What makes it difficult is that they can sometimes weave an entire false reality, making it hard for the victim or victims to recognize that something's wrong.
2. A djinn. Or, as they're more commonly called, a genie. They're not exactly big puffs of gas that live in oil lamps and grant you three wishes. They're a kind of demon with god-like power. They can make their victim think that their greatest wish has just come true, but in reality, they've plugged him or her into a kind of matrix. The victim will feel as though he or she is living for years in perfect bliss when in the real world, the djinn is feeding on their vitae and the victim is dead within days.
There's still a lot of other possibilities. Faeries, of course, can use a widespread enchantment spell, which can fall apart if you find the major flaw. Pocket dimensions and alternate realities can also be possible, though I've never had any experience with them. Trickster gods like constructing and deconstructing entire realities, and they can be killed with a wooden stake, if you manage to corner them. And then there's the chance that I just hit my head and am finally going insane.
Out of the myriad of choices, I'll take the leech. At least that's something I can easily kill.