I am having the exact same issue only with a standard iPhone 7 not a 7 plus. The camera was one of the selling points for me so to find myself unhappy with 80% + of the pictures I am taking is extremely disappointing.
All of my pictures have this strange rippled blur effect to them. As others have mentioned I can only discribe it as being like a watercolour effect has been applied to the picture. It is more apparent when shooting anything more than 1m away. It means that details such as hairs are lost and lines in the background of images which should be straight appear rippled. I have two friends who bought standard 7s (not plus) around the same time as me and their images have the same problem.
I was unsure whether it was a hardware issue until I saw mention of the quality of light room images being much better in this thread. I decided to try it myself and was astounded at how much sharper the images were and how much more natural the colour balance and contrast seemed. I am now convinced that this is a software issue and that it is the standard iOS10 iPhone 7 image settings that are providing the inadequate results.
I've included an example below of two images taken a few seconds apart. The left was taken in the iPhone camera app and the right using lightroom. At first glance the quality may not seem too dissimilar but if you zoom in there is definitely loss of detail within the ears etc in the picture of the left.
More concerning than loss of detail is the way in which this "water colour" effect is adding detail where it shouldn't be. The below example is some faint daylight shining through my window on the opposite wall. The photograph on the left is a standard iPhone camera app picture and has added so much contrast and blur to the light reflecting on the wall that it looks rippled - what you'd expect to see with a really low pixel camera. The picture on the right was taken seconds later using the lightroom app on the sale phone and reflects the actual colours and contrast very accurately.
I am considering taking my phone to an Apple Store but as this appears to be quite a widespread issue I think this is something that only an iOS update will resolve.