Community homes for the treatment of the acutely psychiatrically ill have been established in several places in the world as alternatives to inpatient hospitalizations. We reviewed sources from the psychiatric and psychological literature which examine these models. Several features are common to this treatment setting: fewer residents in comparison with hospital wards; a supportive and caring milieu including intense and regular therapeutic contact with staff; a de-emphasis of medication; and a destigmatization of the therapeutic treatment of psychosis. The models differ with respect to use of psychotropic medication, emphasis upon first admissions, and composition of staff. The varying models are comparable to inpatient treatment in terms of clinical and psychosocial outcome, and generally cost less. For most patients requiring psychiatric hospitalization, residential treatment can be a viable alternative to inpatient hospitalization. Issues of cost, therapeutic effectiveness, and long-term outcomes still need to be studied.