In The Great Gatsby, explain why Nick thought his house was on fire.

The reference to Nick's house being on fire is found at the beginning of chapter five:

When I came home to West Egg that night I was afraid for a moment that my house was on fire. Two o’clock and the whole corner of the peninsula was blazing with light, which fell unreal on the shrubbery and made thin elongating glints upon the roadside wires. Turning a corner, I saw that it was Gatsby’s house, lit from tower to cellar.

Nick had this idea because all the lights in Jay Gatsby's house had been turned on, sending a glare of light into every direction and obviously reflecting off Nick's windows and every other object in the immediate vicinity which could reflect the brilliance, thus creating the illusion.

Nick imagined that it was one of the regular, flamboyant parties that Jay had been hosting every week but was told by him that he had switched on all the lights because he had 'been glancing in all the rooms.'

It is clear that Jay had been checking all the rooms since he was preparing for a visit by the object of his insurmountable affection - Daisy Buchanan. He has been passionately in love with her from the time they met. After their relationship broke off when he went to war and Daisy married Tom Buchanan, he has been desperately trying for the past five years to get into contact with her. That was the reason for his over-the-top parties. He believed they might draw her closer.

Later in the conversation, Nick informs Jay that he had spoken to Jordan Baker, who Jay had asked to speak to him about arranging a visit with Daisy. Nick says that he will invite Daisy over for tea so that the two of them can finally meet. Jay then feels obliged to offer Nick a job as recompense for the favor, but Nick rejects his offer.