A smart home is a residence equipped with technology that observes the residents and provides proactive services. Most recently, it has been introduced as a potential solution to support independent living of people with disabilities and older adults, as well as to relieve the workload from family caregivers and health providers. One of the key supporting features of a smart home is its ability to monitor the activities of daily living and safety of residents, and in detecting changes in their daily routines. With the availability of inexpensive low-power sensors, radios, and embedded processors, current smart homes are typically equipped with a large amount of networked sensors which collaboratively process and make deductions from the acquired data on the state of the home as well as the activities and behaviors of its residents. This article reviews sensor technology used in smart homes with a focus on direct environment sensing and infrastructure mediated sensing. The article also points out the strengths and limitations of different sensor technologies, as well as discusses challenges and opportunities from clinical, technical, and ethical perspectives. It is recommended that sensor technologies for smart homes address actual needs of all stake holders including end users, their family members and caregivers, and their doctors and therapists. More evidence on the appropriateness, usefulness, and cost benefits analysis of sensor technologies for smart homes is necessary before these sensors should be widely deployed into real-world residential settings and successfully integrated into everyday life and health care services.