Anyone experience this odd thing before?

Yes this is just a part of disease. My mom is good mostly but she goes thru episodes that may last a few minutes to a couple days where she hallucinates or "believes" something has occurred. She can recreate the most fantastical stories very believable and some contain maybe some element of truth but are contorted in some way. For example, her older brother (deceased) visits her and she will describe how he looked all the great things they did; another is her dr took her on a wked getaway...maybe my brother was there and walked in bank and stole money from her box....

And she will get in a loop such that these stories or avid descriptions will occur over and over maybe for a few months...then maybe she doesn't have these fantasies for several months.

I used to be alarmed and worried she was getting worse, etc. But I've learned it is just part of the dementia. I have learned to go along with it, ask her to give me more details, offered to help find something or report to authorities (even faking a phone call in front of her) so this seems to validate her thought and appease her. Then I just play along when she asks and say "oh, they called and no leads, but they know you and are working on it). Meds didn't seem to help because she didn't like them and refused to continue on some of the anti anxiety ones.

She eventually can be redirected.

My late bedridden Grandmother-in-law used to rearrange her bedsheets obsessively and when questioned claimed to be filing paperwork. She was quite convinced about it. I think you'd go mad if you tried to root out grains of truth in everything - just find out what works to reassure him.

My mom sees stuff from time to time that is not really there. One day she held out her hand to me and asked me if I wanted some...and her hand was empty. This only happens about once a month though so it still is really shocking when it happens.

Many things are so real to them. I'm at the stage where I don't know what's truth and what's fiction. Last week my mother said there was a man in her room in the middle of the night. There was, a new resident who's a wanderer and he was just lost. I keep her well supplied with chocolates and cookies and people are always stealing those. The NH staff are wonderful, many of them have been there over 30 years and there's a very strict code of conduct. I bought her a pretty long sleeved tshirt and took it to the laundry to have her name put on it. A week later it wasn't back so I went after it. Had I not done so, would it have "walked away"? We do the best we can.

Yes, this is dementia. As pstegman says, appropriate drugs may help. While an episode is happening, don't argue about it. Helping him hunt for the ring until you could redirect his attention elsewhere was a very good approach. Just keep it up!

Yes it's only going to get worse. Dreams become mixed with reality and this is a big problem if the patient has nightmares. Anxiolytics help and anti-depressants keep the dream sequences in pleasant mode. You will not convince him that these things are not real. You can just talk them through and redirect the conversation to a happier place.

This sort of thing is a common ocurrence. In my case mom has a beautiful ring that was given to her when she married 8 years ago at the age of 80. She does not recognize what it symbolizes and sometime thinks she has had it for many, many years. So, it goes many different ways when dealing with dementia. Anything that could possibly be dreamt up will be.