Just finished SH2, please explain the story to me. Is the entire thing just “in his head?”

I much preferred the actual story in the original of having a magic little girl projecting her nightmares. But in SH2, there is very little objective story (not saying it’s a bad thing) however is it safe to assume that the whole thing is just in his head?

He killed his wife to save her from pain, and is feeling bad which manifests in the town? But who is Angela, Maria and Sarah?