I think he meant 525i, they haven't made a 535i in the US since 93, although they are coming back with the E60 (at least in europe, a 3.5 liter V8 shared with the new sixer).
As for the pricing, that 525i didn't cost much more than the 330 new. I think the 5 stickered around $35k base. The E39 chassis five series has been around since the 1997 model year, so it is perceived to be a little long in the tooth and the replacement E60 is just around the corner (here already?), so that may have something to do with it.
If you care about performance, a 330 is a better choice than a 525. That 2.5 has to work pretty hard in the 5.
All things being equal, the more expensive a car is the greater amount of depreciation, even if it happens at the same rate (%), and in most cases the rate of depreciation will be greater for the more expensive car.