I think the kid does realize he's in over his head. He's not a bad singer; he's just not at the level of quality for this competition.
Maybe it's nerves from performing in front of a large crowd. At the audition there was just Simon, Paula, and Randy (plus the camera crew), and during holiday week the other semifinalists. Now, there's a larger studio audience plus the viewers at home. He obviously did well enough through Hollywood week that the judges saw something in him.
Part of me also would like to see him gone before the Bon Jovi mentor/theme week. Not only would his style clash with most of Bon Jovi's material, but (a) Chris Sligh would definitely handle any inevitable "hair band" remarks much better than Sanjaya, and (b) I would sincerely hope he wouldn't choose "Blaze of Glory", because if he does and does poorly I don't think even Paula could resist the obvious comment on the lyrics.