If PHYSFS handles this, then great!
It can find User dir and that's all. But I'm extremely against using that. Not only is it annoying (see below) but it's also more dangerous. I don't want someone's coding mistake to wipe out my Documents or %appdata% (and it's not like indies games are all made by geniuses who don't make mistakes).
Sure, with a zip file installation, anything goes. But that isn't appropriate for any commercial games or applications these days.
I really don't see why not, it's faster, easier and less dangerous. I can't imagine a sane person that is outside of mainstream crowd enough to buy indies be like "Oh, I won't play this game I bought because I hate that I must click once and unzip, something that any windows since XP can do, instead of double clicking an installator exe and clicking next 5 times" and then not play the game. I can imagine however someone being pissed when something breaks and is impossible (or uses some arcane registry digging or looking around in random spots for files) to fix.
Registry and config leftovers cleaning is its own science by now on Windows. I just found leftover of klei config in my Documents folder, on my C, despite telling steam to always use my D. That's just stupid. Now imagine it was broken or (god forbid) broken AND in registry under some idiotic name that I could never figure out. Reinstalling the game should give a clean slate, not create some quasi fresh state where saves and configs may or may not be present from the last installation. Some games (Killing Floor has cache, CaveStory+ has logs) seem to write to the steam library folder so I have no idea what's up with that.
People who play indie games got used to zips I'd say. On gamejolt the few games I've played came in plain zips (and I hope they don't sneakily write their files somewhere or crap into my registry...). If I ever get to distribute a game again it will be a zip and that's it. It's not worth the effort in my opinion to figure out the 'proper' directories to save stuff to, create an installer that just looks professional but does nothing special, etc.