Running vista premium.

Pinging 127.0.0.1 gets me 25ms of average latency.
Pinging 192.168.1.1 which is my wireless router 10 meters away gets me 17 -18 ms of average latency.

What the hell?

Perhaps your router is suffering from interference by some other appliance or magnetic reflection from walls?
Not really sure, since networks are not my specialty, and I've only recently managed to make my own router work.

If his walls are generating enough magnetic interference to bend light I think there's some physicists interested in his house.

Derp, just remembered how to be a nerd. Curse you sleep deprivation.
I can only assume you have some kind of retarded network set up, and 127.0.0.1 is taking longer than normal because of this crazy networks.
I think I'll try this little expiriment myself.

Trac route shows it only goes to my computer.

If the network configuration isn't limiting the connection, and theres no issue with the physical medium, then the 25ms latency is artificial. A lot of loopback interfaces simulate a static amount of artificial latency so as to emulate an actual connection. Useful when creating logical networks--confusing when actually looping back through the device.