I think a lot of people use the terms 'realism' and 'simulation' interchangeably when they're not exactly the same thing. Realism refers to the final result, simulation refers to the process of how the game got to that result - i.e. has the physics engine calculated tens of parameters hundreds of times per second in the areas of engine performance, suspension geometry and tyre contact/heating/wear.
For example, a game might have a supercar that accelerates from 0-100kph in 3 seconds... which compared to information on Wikipedia about the real car, is realistic.
While a game (i.e. NFS) could easily set how quickly a car accelerates through the gears, a simulator might actually calculate parameters that could influence and change that 0-100km, such as the weight of the onboard fuel, the altitude of the track, time of day, air temperature/density, etc. As computers become more powerful more of these parameters can be simulated in real time, depending of course on resource allocation.