While I wouldn't mind having to take care of my weapons after extended use, the rate at which equipment degraded in oblivion was far too swift.
Maybe if after a certain number of uses (weapons) or after taking so many hits (armor) the quality of the weapon degrades from the higher qualities like fine and above and can go past the baseline to bad qualities like worn, poor and then finally breaking. Granted to decline a stage I would rather the uses/hits be around 2,500 to 10,000 (example values) give or take depending on the current quality as having something shatter after a handful of encounters was what I hated about equipment damage in oblivion.
^^ This.
It does seem odd that my weapons NEVER wear out, or that my bow never breaks, or whatever. I think it could be done - in other words, there's an x percent chance that, during a fight, your weapon breaks. Then you have to grab someone else's. That would be realistic. When the fight's over, you take it to a forge to fix it. Other elements could include:
1. a much slower rate of degradation.
2. repairs could only be made at a forge.
3. eventually the weapon/armor would wear out entirely, but maybe could be use for raw materials.
4. cheaper weapons wear down and break faster.
5. Any improvements would prolong the life of the weapon.
All of this could be implimented using the code Bethesda has given us right now.