“I could see the lights on downstairs.”
I imagine he is outside a two-story house at night and he can see light in the windows on the ground floor (because inside the house some or all of the lights on the ground floor are on. ;)) And all of the second story windows are dark (because inside the house all of the lights on the upper floor are off.
“What a damn fool I am, I thought. Do I shake hands or slap somebody’s tail for them? This was no prodigal son returning and if I expected a happy homecoming I was blowing smoke all the way.”
Idiom: “blow smoke”
Idiom: “prodigal son”
Normally when someone returns after being away for an extended period of time, the homecoming is happy and pleasant. People are glad to see you again and shaking hands would be a friendly and normal thing to do.
In your quote, there has obviously been some sort of trouble in the past (with the people who live in the house) and the writer is saying that he’d only be fooling himself if he thought his arrival would be a happy event.