The UE3 can look really good when it's used properly. Gears/Mirror's Edge/Bioshock Infinite being the best examples. Like Ace said it comes down to a proper investment in art. Which in a lot of aspects would be remedied by a focus on baseline hardware/performance instead of trying to push the edge of visuals in every game. In almost all cases, the most hideous and annoying recurring issues in an engine are due to pushing the hardware too much as opposed to focusing development on art to sell the visuals. It creates an environment for third-parties to feel like they need to compete for most visually aggressive, vs competing for most artistically and creatively engaging visuals.
I'd personally love to see just one modern generation where most of the visual production centers on competing for best artistic vision, rather than technically aggressive. I feel like we've been there too often and we've gotten nowhere fast, we've seen it all before. Really, what can more realistic or technically advanced graphics do for us at this stage?