You are right, stripping that wood to raw so that a clear finish would look acceptable would take a very long time. Sanding all that wood to smooth will take a while too. If the stain or paint is peeling down to the raw wood, then this could be a moisture issue and is fairly common of the sunny sides of houses. You don't really want to put a ton of effort into fixing this siding up if it will all just peel again.

ajsmama, Had a very similar problem. Picked up a bottle of Espoma, Earth-tone, Moss Control from Lowes or Southern States (can't remember which), attached it to the garden hose - sprayed and within 36 hours the moss and mold and everything else died and turned a crusty brown. I then took a hose and it washed away. A few areas required a brushing, but it did not harm the stain or paint and did NOT harm nearby plants. It did kill moss that was growing on the ground next to the house though - and I was glad about that. So, I also used in a couple of grass areas to test and it did not harm the grass but did kill the moss. I did not pull up the dead moss and the grass has started to retake its' rightful spot! This was about mid-June.

I have never done anything to ours & it just weathers gray. If you want a more wood color then you'd have to seal it & do upkeep every year. If you pressure wash it I would be very careful to use a low setting. That high pressure can really nick up wood. We use Jomax for our pressure washing. When we had a log home we used Sikkens stain on it. It was pretty expensive ($50 a gallon) but I saw how it looked on our neighbor's cedar house. Amazing! We used the clear but they do have a cedar color I believe. After 5 years their house still looked like it had just been sealed. We loved how it looked & kept the color with no upkeep. This site has the product we used. Click on colors to see them but the cedar color is nice. www.nam.sikkens.com/product.cfm?product_id=3&product_category=exterior

There is an exterior siding stain identification guide to help identify stains in some cases and the cause of it. Brown Stains – Long streaks of brown stains on exterior siding are often the result of rusty nails. However, if the home is old and has cedar wood siding, brown staining also might be oil residue from the cedar wood caused by water getting under the shingles. If it’s a reddish brown stain, it could be the end result of an ice dam over the winter season. Black Stains – Black stains are usually caused by a form of algae, mold, or another type of fungus. It’s often found on the side of the house that doesn’t get much sun to dry moisture from wet weather. However, black staining also could be a result of soot, particularly for homes near industrial areas where wood-fired or oil-fired chimneys are in use. Green Stains – Green stains on exterior siding stem from algae or moss growth. It tends to grow on the siding where the right mix of sun and moisture exists and there is inadequate ventilation. Yellow Stains – Yellow stains on siding are commonly caused by deteriorating insulation or sheathing behind the siding. Water Stains – Water streaks or stains in the same color as your siding are caused by gutter problems. If the gutters on your home haven’t been inspected lately or are old, they could be out of alignment and be causing rainwater to flow behind them or the siding.