You have answered your question without realizing it, artguylarry. The idea is to blend real life with movies, which turns existence in to a film. The plot of A Nightmare On Elm Street consumes John, but not Heather. This is to explain the gray area where fact and fiction bizarrely meet. Heather is forced in to reprising her role, whereas her co-worker disappears. In this scene, Donald is no longer a story character but a natural member of society, but Nancy remains a scripted product. The use of the inside of the iconic house would be a fun addition, but the dynamics of the location better support disorientation. At first Heather sees her home, then imaginary Freddy's, and in the next minute hers again. She then finds herself in genuine Freddy's lair, which has been unwittingly represented through the boiler room that Robert Englund's character is associated with.