The tools are there now. You can make an outstandingly impressive looking game with UnrealEngine3 right now if you ignore restraints of mainstream PC and console hardware. Look at the Nvidia and AMD tech demos for their cards to see what they can do.

But that game would be expensive, time consuming, and not worth the investment if you were planning on making money.

I would say it's better to describe it that they are waiting on tools that allow them to do more with the same time and money budgets on current or next-gen hardware. That's where things like UnrealEngine4 make it interesting because it seems that Epic is saying that PCs are under-utilized graphical work horses now and don't want to wait for the consoles to catch up. It's potentially a huge risk for them to take and it'll be fun to see how it plays out.

To me the tools thing isn't just about graphics, it's about development. Proper tools make high quality games cheaper to make in general. As an example, let's say you want to make a big open world game that has hundreds of indoor locations. You have a team of ten to create those indoor locations. If you can use tools that would allow a team of five people to do the same amount of work in the same amount of time as ten on the previous project then you have two choices. You can reduce your team to five to make the same amount of content for lower costs (and probably being better) or you can keep your ten to create more content for the same costs as before.

If you look at the UnrealEngine4 demos they are just as much about content creation tools as it is about graphics in general.