Yep that is the problem. After further investigation it appears to be seized caliper. I pushed the drivers side pistons back in with the usual effort so I didn't think it was calipers. I should have tried to push in the pistons on the passenger side. the bottom one was seized up good. took a lot of force to force it back in. I'm guessing I caught the drivers side in the early stages of seizing up.
So I got new calipers and bled the brakes. They still drag more than I think they really should. The wheels do not spin freely when the wheel is lifted off the ground. I can move them by hand with a little force but I cannot get them to continue spinning no matter how hard I try to spin them, the wheel will stop immediately as soon as I let go of it. Is this normal for the brakes on first gen Xterras? Is there a proportioning valve or something somewhere that could be screwing things up so the front brakes don't fully release? I don't understand what you mean by "return pressure on the seals to pull the pads off" could you elaborate on this?
