I think that, at some point, the industry will look at the consumer and will realize that photorealism is not what games need.
This might happen after, oh, say the Wii starts selling like crazy. Oh wait!
Raytracing in real-time is just plain not a decent solution. You still have to model (and texture) things for it to work decently -- there's just no point. Don't get me wrong, raytracing rules for easily defined mathematical objects like spheres (woo!). Take a wild guess at what kind of assets/data would need to be produced to make ray-tracing a 3D scene possible though -- textured polygons!
Raytracing is a good lighting solution only, and although you could claim that lighting is a large part of what makes a scene "realistic", there are plenty of decent techniques already available for doing decent lighting and shadow-casting. Raytracing would not make game budgets cheaper, in any way, shape, or form. You'd be better off using the huge amounts of extra CPU power you need to do it by making your animations more complex / animated skeletons more complex. Raytracing is outdated, pure and simple. It's almost useless these days, except for rendering "more" perfect mathematical surfaces, like clean spheres, surface patches, etc. Those aren't "organic" modelling techniques, so even though its a good way to light something, the "something" isn't going to look like a natural object in the first place.
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