What Is Magical Realism?

Imagine a line, a spectrum of literary genres. On one end you have Realism--drama, mysteries, romance, etc . . . Works that are grounded in the real world. (That's 90% of what is out there) At the other end of the spectrum are works created in a different universe: fantasy, science-fiction. These are "world-building" stories which follow their own physical laws.

Realism
    The majority of what's written; firmly grounded in the world that we experience
    Ernest Hemingway, Cormac McCarthy, Agatha Christie, etc . . .

Fantasy & Science Fiction
    Takes place in another world, one with its own norms and laws
    J. R. Tolkien, Lord Dunsany, Isaac Asimov, etc . . .

And that leaves the "*isms", magical realism, irrealism, surrealism, fabulism. These are stories that occupy an area between the first two.

The Irreal/Magical
    Elements of both realism and fantasy, though primarily realistic
    Undermines reality in a small way
    Unsettling

They are primarily realistic with one or two magical elements. They move along as a realistic piece and then bam! a magical or unreal element intrudes and the reader feels the ground under his feet shift. But only the reader: the other characters in the story take the magical or unreal element as normal. This causes the reader to experience a "shift" of reality. It can be quite unnerving! (Have you ever experienced an earthquake? It's like that.)

Magical Realism Elements
    "Dreamlike in nature"
    "Not the retelling of a dream but invoking a dreamlike state in the reader"
    "A subtle alteration of reality with which the story is consistent"
    "Incorporates fantasy elements into reality"
    "Makes the twisted seem real"
    "Requires a willing suspension of disbelief"
    "Many pointers to an unknown meaning"

What Magical Realism Is Not
Magical realism does not consist of magical elements thrown into a story willy-nilly. It contains only a few odd elements. Doing otherwise frustrates and confuses the reader. You want to lead readers onward but not hit them over the head with blunt meanings (this is difficult because readers have varying degrees of perception).

Quotes
"A neutral territory, somewhere between the real world and fairyland, where the Actual and the Imaginary may meet, and each imbue itself with the nature of the other." -- Nathaniel Hawthorne

"The effectiveness of a fantastic story will depend on its being told in the most simple and practical terms." -- Dino Buzzati

"When people use the term magical realism, usually they only mean 'magical' and they don't hear 'realism', whereas the way in which magical realism actually works is for the magic to be rooted in the real. It's both things. It's not just a fairytale moment. It's the surrealism that arises out of the real." -- Salman Rushdie

"A novelist can do anything he wants so long as he makes people believe in it." -- Gabriel Garcia Marquez