The story of dragonspyre is contained in the books that you have to find from the quest. The reason all the people are spirits I am not sure all I can guess is that it got over run by all the dragons and dragonions that they all died in battle and no live wizard/human decided to preoccupy the dragonspyre area. Hope this atleast answers something.
Dragonspyre was once a great civilization, full of life, people, and intelligence. Dragonspyre Academy rivaled Ravenwood, but in the quest for power, a few powerful wizards of Dragonspyre summoned a powerful Dragon Titan. Failing to control it, the Dragon Titan summoned a huge army, and they destroyed all the great structures, monuments, and castles. They slayed all the inhabitants, dragons, and drakes, and everything was left to ruin.