Half the fun about playing games is that they aren't real, they are at the very least exaggerations, or complete fantasy, and don't need to mimic real life. This brings us to the Uncanny Valley! This is a deeply hypothetical and here is the explanation of "The Uncanny Valley" explanation from Wikipedia:
"Mori's hypothesis states that as a robot is made more humanlike in its appearance and motion, the emotional response from a human being to the robot will become increasingly positive and empathic, until a point is reached beyond which the response quickly becomes that of strong repulsion. However, as the appearance and motion continue to become less distinguishable from a human being, the emotional response becomes positive once more and approaches human-to-human empathy levels".
For example: Team Fortress 2 is a more stylized and cartoony looking game. As a result, the characters are more appealing because we recognize that they not real and therefore don't associate their looks and movements to be real. This leaves room for the mind to fill in the blanks, making the characters more iconic and memorable. But looking at the characters from Half-Life 2 looks clunky, mechanical, and odd, even creepy, because they are trying to imitate real human movements and mannerisms.
We interact with people everyday, and there are microscopic subtleties in our movements that we are not even aware of, so when we see a character in a game that is going for "Ultra-Realism", they tend to look more like an animated mannequin or corpse, giving us that creeped out feeling.
One of the other problems from this is the realistic graphics will tend to turn off the average gamer, which is where your larger markets tend to be. Games like Crysis will sell well at first, but will have very little staying power in the stores because everyone who is attracted to the realistic style is a much smaller audience than something that is brighter, more stylized, and more approachable. Not that I am a fan of the MMO genre, but World of Warcraft is a good example of a "Hardcore" game that has pulled in the average gamer because of its colorful visual style and approachable early game play experience.
My only hope is that developers get tired of the "Ultra-Realistic" look and get back to making games that challenge our imagination and give us some room to use our own creativity to fill in the blanks.