Folktales in the past did not always begin "Once upon a time, in a land far away". When medieval German mothers told their children tales, they often began, "Just down the road by the old church, there lives a witch", or "When I was as old as you, I met a dwarf in the woods."
The tales were told about the surrounding region, and often involved people you knew. Your church might have been built by a giant, who made a deal with a Saint, who had to guess the giant's name or be taken to hell. The weird child that lived at the neighbor's farm might be a changeling. Your own father might have seen his cows milk run dry because he hadn't shown proper hospitality to the "Good People".
It's only been in the times of skepticism, the days of science and technology, when everything demands an explanation, that the fairytales have become about bygone eras. And fantasy, which inherited the tradition of the fairytale, has become about bygone days on distant worlds or in alternate universes, where the horse is the most common mode of transportation, and people never ask the question, "How does it work?"
Urban fantasy puts the magic back into familiar settings -- but this time, those settings are familiar to us, here in 2010, not to the farmers and weavers of hundreds of years ago. It puts the dwarf in the parking garage, the elf in the sewer, the werewolf in the mall.
It lets us ask the questions (hopefully all in good fun), is that guy a vampire? Is there a troll in that dumpster? Can I become a witch?
This genre puts a new spin on an ancient tradition. The message is: there are horrors and wonders all around us, in spite of technology (or maybe because of it). In spite of the fact that science tells us it cannot be so.
And the authors have to work hard (and usually do a good job) of making us suspend disbelief, of explaining the unexplainable, just enough that we buy it. Just enough that we never ask, "But... how does it work?"
Just like 200 years ago, we might have believed a story that the magic beans Jack traded for a miserable cow had grown into a beanstalk, without asking the same question.