Each user gets set aside disk space called their "home directory". For example the path to this user's home directory would be /home/johndoe. Inside the home directory is several files and directories for management of services and programs (like the shell, or SSH and other programs)
Ultimately hosted web sites must be stored in the disk space of one of the users on the account. You get to tell DreamHost which user and directory the files are stored in when setting up the domain or "Edit". DreamHost calls it the "web directory". The DreamHost web panel works like this:
First you specifiy a FTP user / CGI runs-as user. This is the user that you login as to manage files for the web site.
Second you specifiy the web directory. This is specified as a subdirectory of the user home directory. ie, /home/johndoe/example.com
Then the DreamHost web server will know to look for files in this particular directory for that web site.
Root is relative term. Again "home directory" is the user's top-most directory. The web site is served from a "document root/web directory" and this must be a subdirectory within a home directory of the "FTP/CGI user" for the domain.
You cannot specify a home directory as a web directory. If you are on a Windows computer, this would be like telling your word processor to write documents in the same directory that all your programs store settings and application files in - not a good idea at all.