ohhh, well if the ending is supposed to be ambiguous then i'm gonna give my own interpretation of it! >:D
i think karen in the past, for whatever reason, murdered those three people in the house we see at the end. since then, to try to detach herself from that event her sense of reality started fading, making her hallucinate the talking animals and replacements of the bodies (maybe she was already going insane before that and that's the reason she murdered those people, in which case this event only amplified her detachment). and she spiralled for so long that she forgot what was it that made her be like this in the first place, causing her to feel like something was missing and sending her on the quest to find that house.
it's probably not the most original interpretation ever haha, but it'll be fun to find out what really happened when i play the other games :>
(and yes the wolf is really cute, sorry lol-)