He'd had a nightmare. Well, not a nightmare. The nightmare. The one he'd been having a lot lately. The one with the darkness and the wind and the screaming. The one with the hands slipping from his grasp, no matter how hard he tried to hold on. (1.3)
It's interesting that Conor says "the screaming" and "the hands" instead of "his mother's screaming" or "his mother's hands." It's one more form of denial—if he doesn't say it's her in the dream, it might not be (though of course it is).
Only a baby would have thought it really happened. Only a baby would believe that a tree—seriously, a tree—had walked down the hill and attacked the house. (2.11)
Here's an example of the dark humor Ness intersperses throughout the book to lighten the mood a bit. We see what Conor's thinking, and we're with him in wondering what's up. We're just as dumbfounded as he is as to what's real and what's in his head.
When Conor started having that nightmare, that's when Harry noticed him, like a secret mark had been placed on him that only Harry could see. (3.8)
Bullies often bully out of fear. Harry could very well be afraid that what's happening to Conor's mom will happen to his, and mocking Conor is a way of mocking death. At the very least, it's a clever parallel between Conor's nightmarish real world (in which he's bullied by Harry), and his all-too-real nightmares (in which he's bullied by death).
Stories are the wildest things of all, the monster rumbled. Stories chase and bite and hunt. (5.53)
How can a story "chase and bite and hunt?" Well, all we need to do to answer that question is take look at Conor's dream. It's chasing him down in his sleep (chase), it wants to yank his mom down into a pit (bite), and it won't stop until it gets her (hunt). That's Conor's story. That's the truth the monster wants.
But what is a dream, Conor O'Malley? The monster said, bending down so its face was close to Conor's. Who is to say that it is not everything else that is a dream? (5.21)
Welcome to The Matrix. Will Conor take the red pill or the blue? If he's dreaming it all, that explains the yew tree monster—it's just like the pit monster, another figment of his imagination The problem is, the pit monster doesn't leave no stinkin' berries behind to confuse the situation.
You think I tell you stories to teach you lessons? the monster said. You think I have come walking out of time and earth itself to teach you a lesson in niceness? (9.28)
There's that dark humor again, and we've got an example of turning the expected moral on its head, to boot. The monster's sarcasm mirrors Conor's own, making them worthy foils.
"I thought it was a dream at first," Conor said […], "but then I kept finding leaves when I woke up and little trees growing out of the floor. I've been hiding them all so no one will find out." (13.26)
Do you believe these things were really happening, or was it all in Conor's imagination all along? Was there ever really a monster? And how can we know for sure? Okay, we'll cool it with the questions. We just really want to know!
The real monster […], the real nightmare monster, formed of cloud and ash and dark flames, but with real muscle, real strength, real red eyes that glared back at him and flashing teeth that would eat his mother alive. (28.42)
Giving a monster red eyes is one way of making it human-ish, but it's also just different enough to keep things super scary. Like Bunnicula.