As Fargus said, the Penn only sold the air rights above the underground portions of the stadium, where MSG and the Penn plaza buildings are located. I believe MSG is actually owned by the city in that they have basically given the current managers of MSG (Cablevision) notice that their right to use the place will end in (now) less than 10 years,supposedly to build a new station. Penn Station itself is owned by Amtrak after it took over the Penn Central.
As to why Penn Central was knocked down, there were a lot of reasons. As people have noted, the Pennsylvania Rail Road was in deep trouble, and politically rail travel, including commuter rail, was seen as an anachronism in the days of the ascendant automobile. You had people like Robert Moses running around, who saw cities basically as places to build highways through so people could travel from suburb to suburb (and he had a backstage hand in the demolition of Penn Station, he hated rail and mass transit), so when it came to Penn Station, what people in power saw was an aging structure that (in their eyes) soon would serve no purpose, they had visions of a NYC where businesses all went out to the suburbs, where people could drive to their wonderful office complexes on highways that could more than handle the traffic (!) (I am not kidding, this is my paraphrasing an actual report of urban planners), and NYC would become basically a place where the well off, who would have cars, would live.
There were other factors as well. Sonny Werblin (later the owner of the NY Jets who signed Joe Namath), was a show biz kind of guy, and he was the owner of the old Garden, and he wanted a new showplace that he could say "was the newest and best around", so he pushed for it; In the early 60's, there was a major slowdown in the building trades, and the builders unions and the construction companies like Turner and others were looking for big projects to revitalize their prospects, and I think it was Tishman Speyer or one of the big management companies that wanted to build the office buildings now called Penn Plaza, they saw gold there, so there was significant public pressure on Albany to have this project go through. More importantly, most people, other than a relatively small handful of city planners and lovers of public architecture, didn't really care (until the station was knocked down and they saw how dreadful the new Penn Station was). Keep in mind around the same time as Penn Station that Harry Helmsley was going to knock down Carnegie Hall to put up a drab office building (if it weren't for Isaac Stern and a handful of very influential, wealthy people, it would have been destroyed),and even after Penn Station, Grand Central might have been knocked down if some influential people, including Jackie Kennedy, hadn't mobilized to stop it (NYC didn't not have a landmarks preservation law until several years after Penn was knocked down).
It all added up to a tragedy, the only good that really came out of it was that people suddenly started understanding that not everything that is proposed as 'change' is done for the right reasons.
I am extremely skeptical that a new Penn Station will be built. I don't think the funding is there. I really hope it happens, but they are going to have to figure out a way to fund it, given the kind of businesses in NYC that depend on people commuting to their jobs, and hotels and the tourist business that might do well if we have decent rail travel to NYC, kind of like the business improvement districts where businesses self tax to pay to clean up areas. Reputedly Amtrak is serious about the gateway project, including new tunnels, maybe a public/private consortium would work.
