3. Why were people glad to find out that all Emily's father left her was the house?

Emily is a very unusual woman.  She is very reclusive, never coming out of her house.  She also refuses to pay taxes.  She keeps insisting that she does not need to pay taxes because of her father.

Colonel Sartoris invented an involved tale to the effect that Miss Emily's father had loaned money to the town, which the town, as a matter of business, preferred this way of repaying. Only a man of Colonel Sartoris' generation and thought could have invented it, and only a woman could have believed it.

Emily’s odd behavior is a direct result of how strange her father was.  He ran her suitors off with a horse-whip, because none of them “were quite good enough for Miss Emily.”  As a result of this, Emily never marries and ends up alone when her father dies.

When her father died, it got about that the house was all that was left to her; and in a way, people were glad. At last they could pity Miss Emily. Being left alone, and a pauper, she had become humanized. Now she too would know the old thrill and the old despair of a penny more or less.

In other words, Emily is just like everyone else now.  However, she really isn’t.  Emily still considers herself superior, and still refuses to pay taxes.  She doesn’t even want to give them her father’s body.  When people came to pay their respects she met them at the door and told them her father was not dead.

The smell is another example of how the town made concessions for Miss Emily.  They solved the problem by having a group break into the cellar and sprinkle lime.  The smell went away.  It was not until years later when Emily died that they found out that Miss Emily did have one suitor, and his body was still in her bed.

Explanation:

"the sandy walls seemed to collapse in on themselves"

and

"the bloodshot waters seemed to have no bottom"