Ben and I are spending our first two weeks in the a hostel called Hospedaje Dolcevita. When I think hostel nothing this nice comes to mind. This place is very clean, nicely decorated, and has comfy beds, all new experiences for me in the world of hostels.
The location is great, and easy walk from Sol, The Prado Museum, Gran Via, and is surrounded with great restaurants and night life. It is situated in gay barrio (Chueca), which makes the area an estrogen free zone after midnight. Almacen de Cervezas, a gay bar below the hostel serves a ridiculously good lunch, despite the dingy appearance. Ben and I also ate at Udon (a Japanese fast food restaurant), and Toca Jamon (Tapas Bar) which both served excellent food.
The hostel is located on floors 3 and 4 (read 4 and 5 if you're and American) with no elevator, which is exhausting after a long day. The stairs offer extra challenge as they are very uneven and worn, I'm fairly certain it would be impossible to make it safely down the stairs while drunk in high heels.
The view from the roof of the hostel is worth the price of the room by itself. The ocean of roof tops is breathtaking and is a perfect place to enjoy a romantic dinner as the sun sets.