The key was “crushed”, in the sense that powerful force pressing its opposing surfaces towards each other was exerted upon it, but not in the sense of “imploded and broke”. The narrator certainly tried his best to use enough force to break the key, but the crushing grip of his fingers was not up to the task. This unorthodox use of the English language was foreshadowed by the Sorcerer’s tendency to use “it’s” when “its” would be grammatically correct.
But since I don’t know when that key could’ve been used, I suppose this point is moot.
What isn’t moot, however, is this.
The serial killer is the narrator’s sister, and the other person mentioned in the red truth regarding the two people inside the house. The narrator’s other sister is in the house as well, but unfortunately she is brain dead, and thus counts as a living human but not as a person. This is how three human beings could’ve been inside the house, but only two people.