I'm using a beta of Cyanogenmod 7 and it seems unlikely they would leave out home and search button functionality. I tried rolling back to the RC and then getting the latest nightly and then wiping the data and cache and then getting the latest RC and nightly. But still, when I press Home or Search, the phone vibrates as if I pressed something but doesn't go home or bring up a search box. Thankfully, "back" still works.
Is the hardware defective??