iwfai,
What you say makes perfect sense theoretically, but it is not what is actually happening in practice. A broker I know in the Palm Springs area took an all-cash offer on a short sale to the bank for $475,000. The bank dicked around and dicked around, and finally the prospective buyer got pisssed off and walked away. The owner got pissed off too and took the home off the market, only to put it back on a few months later. Long story short, my broker friend found another all-cash buyer for $350,000 and the bank accepted!!! I know it's not rational, but neither the banks nor the owners are completely rational at this point.
BTW, the same broker friend of mine, who has been in the business for forty years, just wrote two loans, Freddie and Fannie, for 4.62% on a 30-year fixed. That means you can borrow $100,000 for $514/month. That's the lowest he has ever written a 30-year fixed loan for. Maybe this will begin to nudge home sales a bit.
Bladerunner
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