regardless if it spreads or not, rotted wood is not a suitable substrate for nailing/attaching any covering to.

Well, I am not suggesting that the old wooden siding is all dry rot, just in some spots. And, besides, there fresh new wood will be installed to give a uniform "nailing" system of rails. My concern is that a house that has nice new siding on it may have a lot of rotten wood underneath, and if it is at least stable, I suppose it doesn't matter. And then there's the trim boards, which are almost always pine or fir and almost always have some rotten spots, which are just covered with an aluminum or other thin material.

You should at least scrape out the soft material and treat with Terminate or other product. There's the chance that moisture from a leak or condensation could reactivate the organisms and the damage could continue.

Thanks, Terminate is a product (or class of products) I was not aware of. I'll look into it.

I don't understand where your question is going.

"Well, I am not suggesting that the old wooden siding is all dry rot, just in some spots. And, besides, there fresh new wood will be installed to give a uniform "nailing" system of rails."

OK if you're replacing rotten wood then you're not going to cover it.

"My concern is that a house that has nice new siding on it may have a lot of rotten wood underneath, and if it is at least stable, I suppose it doesn't matter."

If there is a lot of rotten wood under new siding then it probably isn't secured properly. This would matter. FWIW, before I bought an older house that had been vinyl-sided (and especially if I suspected rot under the siding) I would "unzip" a couple pieces in likely rot areas to check out the substrate.

"And then there's the trim boards, which are almost always pine or fir and almost always have some rotten spots, which are just covered with an aluminum or other thin material."

Agreed and localized rotted locations probably aren't a big deal except that the rot often occurs at the ends of the boards which need good material to nail the bent facia covering. Either the installer needs to do really good brake/sheet metal work or the boards beneath were replaced before covering.

IMHO, putting new vinyl covering over old, deteriorated, siding is like putting a rug over a hole in the floor.

Siding does not stop 100% of the exterior water. Felt or another barrier is the final protection on the sheathing. Any rot is likely to continue (though possibly at a slower rate) under new siding.

what brickeyee said.

Somewhere on the Taunton site there was a good artical about proper installation of vinyl siding. The pro made it very clear that even properly installed vinyl siding did not provide much protection against moisture, especially wind driven water. The original wood siding and wrap allowed water to penetrate and the added vinyl did not resolve the issue. If memory serves, the solution was to remove the layers and properly fix the wrap and any flashing, then re-side.

So, the thing is, new vinyl won't keep the areas dry. If they are not dry they will continue to rot. Fix what is there first.

Fixing dry rot is a two step process. First, you need to kill the mold spores that are eating at the wood. There are commercial products that do this but you can also us a mixture of ethylene glycol (antifreeze) and boric acid (roach powder) which kills the spores and protects against termites. This treatment is fairly permanent unless the wood repeatedly gets wet.

After treatment, the wood will still be soft in the affected areas. You can use a thinned down automotive epoxy (thinned with acetone) as a wood hardener.

In areas where the decay is really bad, you can drill holes and fill with bondo -that is if it is easier to do so than to totally replace these sections with new wood.

I know it sounds like body shop but products similar to these are sold as wood repair products at a premium price.

I agree that for a proper fix, you need to restore the wood before covering it up.

Just making a "re-visit" to my post. I sent IrishBrewer a thank you and note for his very helpful input.

I also see interesting inputs from "sdello" which appear to refer to another input I don't have. Nonetheless sdello's input does raise a concern I've had about aluminum/vinyl siding. I recall seeing something on "This Old House" where the restoration involved removal of a cover-up siding. One of the old "hands" was very negative on siding, which I think I read here as well.

On fix-up rather than cover-up of trim boards, the source of my problems that caused this posting, I see at Home Depot a product that looks almost like wood, but is some type of "plastic", and comes in widths and lengths that could be used to replace the vertical corner/trim I'm having dry rot problems with. Any experience/advice out there on this product (assuming I described it sufficiently)? Does one cut and nail it just like wood?

The plastic 'boards' (and even hardiplank a cement based product) are an improvement for small section wood trim.
Paint and finishes cannot stop moisture movement in and out of wood. They slow it down, but it still enters and exits. This causes the wood to change shape and size, causing defects in the finish (cracking and checking) allowing more moisture to enter directly.
Plastic boards will move with temperature, but typically not as severely as wood with humidity. One exception is length. While wood barely changes length, plastic changes the same in every direction.
Hardiboard barely moves from temperature or humidity and is excellent for small section trim.