Granted, the story's more on survival and friendships/teamwork than on the gruesome deaths, though I think most people will admit they were drawn to the game because of the gore. The use of sprites, great game-play, the pretty detail on the still images, and great character development are other reasons why, but you have to appeal to the horror/guts-and-gore fans first from the get-go before you spread out from there. Word-of-mouth is a pretty powerful technique.
Dead Space is not a horror game. Not even 1. Completely predictable jump-scares do not make a game "horror".
The best horror game I've played is Amnesia: The Dark Descent. Besides maybe Silent Hill, nothing even comes close to it. The sequel, A Machine for Pigs is also going to come out this year and it looks amazing so far. I highly recommend it to anyone that likes the genre.
Another one I enjoyed is the Chzo Mythos series, but they're crudely done in AGS so consider yourself warned.
Survival horror was never really massively popular, it was more of a flash in the pan brought about by the popularity of the original Resident Evil, and that popularity was mostly built on RE's graphics and acted cutscenes; no one outside of Japan actually liked tank controls, it was a thing people mostly just knew they had to bear with. Eventually Capcom itself realized that the RE4 direction was much more lucrative, what with the zombie fad and all. Silent Hill is no longer what it used to be because the team behind the amazing original trilogy is no more, and Japanese horror games are no longer perceived as worth localizing (such as was the case with Fatal Frame IV for Wii). The only thing approaching a survival horror game on cutting-edge consoles this generation was Dead Space, which was rapidly sequelized into an action-heavy gorefest. It's part of something endemic to the game industry these days, where games can no longer focus on things like exploration, ambiance and micro-management (all essential to survival horror) without catering to a reduced niche market only.
It's very much a shame because I'm a fan of the style, but there's no market for it anymore. At least previous generations left us with a wealth of good-to-great survival horror games that flew under a lot of people's radar, such as Carrier for DreamCast, the Fatal Frame series for PS2, and Eternal Darkness: Sanity's Requiem for GameCube.
Other than that, I'm afraid you'll have to look towards the indie market to satisfy your horror needs. Fortunately it's been producing some very cool games, Amnesia: The Dark Descent being a recent standout.
To any Resident Evil fans out there all the RE games on PSN are on sale right now. I'm thinking of picking up a few myself. First price is regular, second is PS+
Resident Evil Director’s Cut (PS one Classic) -- $4.99 / $3.49
Resident Evil 2 (PS one Classic) -- $2.99 / $2.09
Resident Evil 3: Nemesis (PS one Classic) -- $2.99 / $2.09
Resident Evil Code: Veronica X -- $13.99 / $9.79
Resident Evil 4 -- $13.99 / $9.79
Resident Evil 5 Gold Edition -- $20.99 / $14.69
Resident Evil 6 -- $20.99 / $14.69
Resident Evil Operation Raccoon City -- $27.99 / $19.59
Resident Evil The Umbrella Chronicles -- $10.49 / $7.34
Resident Evil The Darkside Chronicles -- $10.49 / $7.34