I would rather let the people that like that speak for themselves. It could very much be nostalgia-filled snobbery, or they simply really like the look of PS1 graphics. I don't have their eyes, and they don't have mine.
When I play PS2 games, I absolutely adore the "blurry" look those games had. There's zero nostalgia there. I genuinely like how it looks.
But it's not something I want new games to adopt. It was that way in the PS2 era, and if I want that, well... I go play a PS2 game.
Same with the PSX. There is a particular look to them, and some I adore as well. Resident Evil 3 and Breath of Fire 4, being good examples.
If there are more games going back to that, that's fine. As long it has artist value, which is subjective.
You are going for that look, because you want to do your thing with it. You want to achieve something that enhances your game, it's atmosphere.
Not because you want to pander to yours or anyone's nostalgia. Nostalgia, to me, is a hindrance to art.
"Do we need more realism?"
We don't NEED anything, besides art-style. That is in the hands of the developers. As long as the game has a interesting art-style, you can make the most photo-realistic game ever, or the most cartoony game ever. What will make it interesting, is the art-style.
See Metal Gear Solid 5.
What makes that game so arguably gorgeous isn't exactly the realistic graphics. It's the art-style. The use of colors, how the sun light or rain compliments the look of the game, the character designs, so on. Very few games look like Metal Gear 5.