The scoop is that we like hostels in the center of the city! A couple friends of my family from the USA came to town a month ago (two 20-somethings backpacking through Spain), and stayed in some hostel in Barcelona's Sants barrio. Do NOT stay there. It may be cheap but you will be in the middle of nowhere and will have a long metro ride to look forward to every night. Stay central and make the most of your time in the Catalan Capital.
Budget Madrid Stays for New Year’s 2011