To answer your question: "is it possible for things to seem really bad and then be great?" I would say yes, it is, depending on the circumstances.
I broke up with my husband in December (I still need to talk about it in my journal, which I think I'll do in about a month when things are sorted out more). Now, I'm not back with him, but that's the background information.
It stirred up a lot of things, and I had very strong arguments with my boyfriend, Sean. In the end, we seemed to be in a situation where nothing would work, we were doomed, everything sucked, etc. He said we should probably end it, and that he'd send me my ring back, and it really seemed final. It was very hard on me, because I had just lost a relationship with my husband, which was already hard (although I initiated it) and now I was seeing myself lose my other relationship.
But... we ended up getting back together the next day. We were both adamant that we were ready to do anything to make it work, and our attitude changed from very negative to very positive. Having thought about it, we realised what was important for us, and we felt closer than ever.
I think it's possible that something similar happened to S and B. The affair probably started a big argument, as things like that can, with a lot of stress involved, etc. Once it settled down, they could see things in a clearer way, and when they talked about future projects, they realised they wanted to live with you. And from then, things started to make sense, they knew were things were going, they were feeling like everything was great.
I think it is possible that something like that happened. Sometime when you're dealing with strong emotions due to another situation, a big argument can start, and after you calm down you realise what it was all about, that you were just stressed out. And sometimes, almost losing something makes you appreciate it even more. So I don't think it's necessarily something for you to worry about. Of course, I don't know their specific situation, but it's quite likely that things are indeed fine.
So I'd suggest you stop asking him before he gets annoyed :P