Graphics tech is pretty nice right about now. We've got all sorts of effects that make stuff look pretty, with normal maps, bump maps, spec maps, diffuse textures, advanced lighting ad shadowing, etc. However, we've gotten to a point where photorealism can be achieved easily, even on the relatively underpowered hardware of today's consoles. A look at Halo 4's cutscenes will often cause one to pause to register that the faces onscreen are in fact CGI, and it's not uncommon for someone to confuse a car from Forza with the real deal. Things can get better, but it's not the visual rendering engines that need to get better.
You see, when going for photorealism, part of that is that we recognize when an object behaves correctly when subjected to various stimuli. For example, the water in Halo's multiplayer maps looks pretty realistic when left alone. But when you subject it to, say, a forge object that should be capable of picking up water or retarding it, the illusion is broken. You can't dip a warthog in the water then pull it out with some water still in the seats and the bed. Likewise you cannot build a Rapture-esque underwater tunnel out of forge pieces due to the properties of water not being fully simulated. While Havok Physics is a start, if we want to get better visuals we need better physics. We also need art design that takes advantage of the new tech better than we have now.
That's my two cents.
(and maybe more importantly, less memory and computation needed for that so we don't have to have datacenter-style cooling in our systems).
