Ha. It varies. Sometimes it makes me better, sometimes worse. I remember playing waterisgoodforyou's Zangief with a housemate watching and it made me rein in my RAGE at failing to get anywhere because I didn't want to throw a Streetfighter tantrum in front of him. He also suggested a character switch to someone totally different and it almost worked.
Also depends which housemate it is. One has played any and all 2D fighters for years like me, so he has to stop himself backseat SFing and I play very badly when he's watching. One was a PC gamer until he ended up living with us. He's learned SFIV from scratch and I've helped him along. I play well when he's watching and he has some useful input because he's put in a lot of time and research and stuff. He has a useful Cammy now, and I felt an odd sense of pride when he picked up some tourney wins at that Hitbox event.
The housemate who was watching last night is a SF novice and doesn't try to coach. He just reacts in the right way. Comiserating and congratulating, being impressed when something crazy goes down etc. I have no problem playing when he's around.
My other housemates are two girls who draw the line at Zelda and Sonic Racing, and ask "is this Streetfighter?" whether it's BlazBlue or Fighters Megamix on screen. Again, I don't care if they watch, and again it makes me not get too worked up because it's embarrassing to do it in front of non-nerds.