The engine has very little to do with the quality of the graphics. The Source Engine still offers good graphical effects, they are just hard to tap into. Not many engines today can out-do source when it comes to adding graphic options. Graphics win or fail dependant on the artist, and in this case the textures are amateurish.
Postal was never on par with modern day graphics, usually a year or two behind the times but its usually pretty fair priced and the laugh out loud and replay value is priceless. Postal 2 reminded me of Duke Nukem meets mindless GTA III violence . What's not to love?
I never played Postal, but I very much enjoyed Postal 2. It's too bad they switched from Unreal to Source, since I personally think the former looks better. I'm guessing the game will require Steam then, though it could be worse.