BardStephenFox said:
You are definitely wearing armor! The Wild property just allows you to retain your armor bonus while wildshaped and makes the armor unseen. It doesn't reduce armor penalties, weight, etc. It is a weird ability in that they don't explicitly clarify some of those issues. I would probably have it resize to whatever size you wildshape to. That way, you don't have a sparrow trying to fly around with really heavy armor. The armor would resize to appropriate size. However, that does not change the fact that you are still wearing armor.
True, the wild property allows you 'merely' to preserve an armor or shield's armor bonus (and any enhancement bonus) while in wild shape. It doesn't reduce armor penalties, weight, etc. But it doesn't have to: it is wildshape that removes those effects of armor.
Wildshape refers to polymorph, and polymorph refers to alter self. Alter self says that equipment "either remains worn or held by the new form (if it is capable of wearing or holding the item), or melds into the new form and becomes nonfunctional. When you revert to your true form, any objects previously melded into the new form reappear in the same location on your body they previously occupied and are once again functional."
Non-functional suggests that any of its effects cease the moment it becomes melded. This certainly includes any benefits the item would provide, but would logically also include any drawbacks. I would argue, for example, that a melded Robe of Powerlessness would no longer have any effect on the character. Now does encumbrance and weight count as a function that "disappears" when wild-shaped? That's not clear. But if they are unchanged, wildshaping into tiny and fine shapes would be extremely inconvenient, which doesn't seem to be the case. So what does happen?
Your suggestion that the items resize themselves certainly suggests that the encumbrance and weight is reduced, perhaps greatly reduced. However, I don't find any support for the notion that armor would resize itself because the wearer changed size. The Size and Magic Items section of the DMG (p. 213) indicates that magic armor does not change size on its own; thus if a wearer becomes tiny, the armor doesn't shrink with you. Normal items, of course, do not have the ability to change their size. Unless a spell or ability says otherwise (like Reduce Person) I can't see where this new ability would come from.
But I do find evidence to suggest that the item disappears: The fact that the armor "reappears" when you reassume normal size suggests that it has disappeared. This is also compatible with the notion that equipment that melds into your form does not significantly encumber you, and is compatible with the (strained) reading that weight and encumbrance is one of the "functions" of equipment that cease when the equipment melds.
So if a druid who turns into a sparrow is not to be immobilized by the weight of her equipment, one of two things has to happen: either the equipment reduces proportionally in size, or it disappears. My argument is that the first possibility cannot be squared with the rules, and that the second is quite probable. So I go with the second.
One argument that I *do* see as being plausible is that the dragonhide armor would not disappear when one changes into the form of an ape. Rather, the armor reshapes itself so the ape wears the armor. It might be necessary to change into a Large creature in order to make the (Medium-Size) armor disappear.