Question: Are the Dunphys Jewish? Claire mentions Hanukkah in this episode.
Answer: No, they're not. It was just a joke because they said they've only had 8 consecutive days of bliss, which just happened to be in December 2007, and it was the Dunphy's version of Hanukkah. They're just comparing it to Hanukkah because Hanukkah also lasts 8 days. The Dunphys have been shown to celebrate Christmas, with presents, Christmas tree, etc, and the Pritchetts have Christmas traditions (see s01e10 "Undeck the Halls").
Answer: He has seen himself dancing, and is mortified at how bad he looks.