This phrase is as old as I can remember (in excess of 30 years) and definitely a part of the New Yorker lexicon and if you look back at some of the people that have been linked with this phrase in the media over the years (i.e. John Fox, Coach, Carolina Panthers) you will see that they spent some time in the New York area.

I am not sure you can attribute it to any particular ethnicity as, in most urban environments, dialects and slang tends to bleed over; however, this phrase was (and is) particularly popular in the Italian/Sicilian communities. As someone mentioned... it is similar to c'est la vie in that life is what life is.

You want to respond to the question but as a New Yorker you know that people are asking to be polite... they don't REALLY want to hear how your is... it is just small talk.

If I had to define, 'It is what it is!' it would be the short equivalent of saying:

'The situation is not ideal, in fact it could probably be better but complaining about it is only going to waste all of our time and won't actually do anything to improve it so I am just going to press on with whatever it is that is not ideal about this situation and make the best of it, hoping that it will improve over time, either of it's own accord or by eventual action... beyond that... what can I do about it? I can't really complain.'

You can say all that... or you can say 'Eh... it is what it is!'