Should I replace my siding?

If you don't replace the siding the walls underneath the siding can also get damaged and eventually you'll have a much larger expense on your hands

Since a woodpecker had damaged the siding more than likely you're going to get water intrusion at some point, which will create a bigger issue. 

If a buyer looks to buy your home they'll discount your home because the siding needs to be replaced. 

It would make more sense to spend money on the most cost effective way to make the siding look like new so you can maximize the value of the home. 

As for cost...always get at least three bids. I prefer toget five

If you are planning to live in the house for the next few years/decades, then replacing the siding makes sense if it is indeed beyond repair.     If you are going to sell it soon and it is underwater, you will have to recognize that siding in shoddy shape doesn't add to the sales appeal of the house.

At this stage, I'd probably go with hardy plank.  

My strong advice is that you do NOT replace the siding unless (1) the siding replacement will allow you to sell your house in a normal sale (not a short sale or foreclosure), or (2) you are able to stay in your house for a few more years until the home's value improves and you're no longer running the risk of a short sale.

The logic behind my advice: If your home is sold through a short sale, you won't see any of the money from that sale. If you put up new siding, you'll spend money so that your bank gets more of its mortgage money back at the time of sale. But this won't make any difference to you, whatsoever. If you have a short sale on your credit history, it doesn't matter how short your sale was. You'll still have about a 5 year ding on your credit history. So unless your new siding can get your home to sell above the short sale threshold, that new siding won't save your credit for the next 5 years. I'd say it's better for you to hold onto the money to use on your next home.

One other thought: You might want to consult with a local real estate attorney to see if there's a case to be brought against the person who built the home in 2008. A house built in 2008 shouldn't have shoddy siding so soon after construction. There might be a way of getting the contractor to cover the replacement for you.