I’ve had trouble with that, too. When SH1 came out, I thought the town had been abandoned due to the supernatural activity, and the demon children, nurses, etc. were ghosts/zombies/transformed monsters of the victims that had been killed before the townspeople left. But now I’m not sure. I’m leaning more toward your interpretation of there being an everyday and populated Silent Hill, a foggy and deserted Silent Hill, and an alternate/nightmare Silent Hill. It all depends on the psyche/guilt of the person in the town. Or in the case of SH1, Alessa’s projecting it onto Harry and Cybil.