By the time Kerbs returned, his home town had quit “the greeting of heroes” and “the reaction had set in.” What is this "reaction," and how does it affect Kerbs?

"Soldier's Home" represents the lost generation, the WWI veterans' conflict with society upon their return home.
The conflict in the story is man vs. society, in that the small town community's perspective of how life should be lived differed from those soldiers whose outlooks on life had been drastically changed by what they had experienced in the war. By the end of WWI, most people were eager to return to normal life; there was even a presidential campaign slogan in 1920 by Warren G. Harding that appealed to a widespread desire to "return to normalcy."
Because Krebs returns home late, he not only misses the welcome for heroes, but he also misses the window of opportunity to be heard, understood, and supported in his post-war grief. The entire quote that this question references reads this way:

By the time Krebs returned to his home town in Oklahoma the greeting of heroes was over. He came back much too late. The men from the town who had been drafted had all been welcomed elaborately on their return. There had been a great deal of hysteria. Now the reaction had set in. People seemed to think it was rather ridiculous for Krebs to be getting back so late, years after the war was over.

The word "hysteria" in this quote shows that the public did, for a time, experience extreme emotions regarding the return of their soldiers. Hysteria implies a loss of emotional control, so one can imagine that there were overwhelming feelings of grief, joy, pain, and pleasure clashing together all at once. There was probably grief and pain for those who did not return—or in acknowledgement of what those who did return had been through—and there was joy and pleasure in celebration of the heroes' ultimate victory and safe return.
Krebs greatly needed to know his community felt all of these emotions regarding himself and the others who had served, but he returned too late, so they reacted by pressuring him to return to normal—to be the Harold he was before the war changed him.
While his community is eager to move on from the war, Krebs is still processing the past, and thus people's reactions towards his war stories and his behavior are not what he thinks they should be. Because of their reactions, Krebs feels pressured into lying so that they can be entertained by his stories.
Additionally, they react to his stories by imposing their idea of how he should live upon him. This is best seen in how Kreb's mother tries to make him pray when he is unwilling. She tries to communicate that she understands the temptations he faced, even though the appropriate reaction she should be taking is to listen and attempt to understand his experiences. It is also evident in how his father tries to pressure him to get a job before he is ready.