A few years ago I would've said SH2 for sure, but now I consider both equally great.
The story is by far better in SH2, but the main character (James) -- I think -- is lacking personality. I'm just not feeling his struggle; I can't sympathize with him. Sure, it can be argued whether or not it's essential to the story at hand, but to me he's kind of an idiot at times.
Heathers character, on the other hand, is given a lot more attention and thus I can identify myself with her. What the story is lacking Heathers character makes up for. It doesn't hurt that the graphics in SH3 is quite possible the best for any PS2 game ever.
Pretty much this.
Over the years, Silent Hill 3 has actually gone on to become my favorite game in the series. Any time I feel like having a stroll down memory lane and playing through one of the original titles, I always find myself reaching for 3. Sure, the story is a little weak, compared to the other original games
, but it far exceeds any other Silent Hill title in almost every other aspect. The characters, environments, atmosphere, sound design, the overall art design... it's all top notch. It's everything that I personally could ask for in a Silent Hill game.