I'll use an Internet meme for this: "Why not both? "
Why not use real data, and use some sort of "procedural refinement" for low-detailed areas or ones that are not at all based on the the color map? I think it is a good balance between real and procedural data. Of course it will be made externally or before simulation.
Question about the graphics: how will terrain be graphically implemented? I guess tessellation is not a feature on DX7, but is there a Level of Detail feature that reduces the terrain vertices with distance?