You're absolutely right that he didn't realize it. James suffers from delusional disorder...and probably a bit of schizophrenia too. Although, you have to take into consideration that he was in Silent Hill...and that town isn't normal to anyone. The monsters are real, but they appear in specific forms for James, with the exception of Pyramid Head. His appearance is most likely universal despite the fact he's only exclusive to SH2.

More than one person can see the monsters, they just appear differently. In Silent Hill 3, Vincent asks Heather, "They look like monsters to you?" It kind of makes you wonder just what everyone else sees. Though, Vincent does follow it up with "It's just a joke." So more than likely, he sees things similar to what Heather sees. He isn't particularly fond of "paradise" by the end of the game.

And finally, we can't forget: The origin of the monsters and Alternate Silent Hill in the first SH are Alessa. Samael resides in Alessa. So what it comes down to is that Samael is responsible for all the bad crap that appears in the town.

Now let's back up to what James sees, once again. Samael decides to deliver Silent Hill to James from his delusion and guilt, which is exactly what he gets. It's the same for all the other characters in Silent Hill 2. The creatures appear in forms Samael decides to tease them with. The only exception is Laura and Maria, since Laura simply doesn't see anything harmful, and Maria is part of James' delusion.

Probably a tired theory, but it's probable.