Banks are going to sit on inventory (whether actual 'shadow inventory' or the flood of pre-foreclosures out there that the banks are effectively ignoring) until they believe they're truly stuck with the losses. They won't be. Odds are the gov will assume a huge chunk of this debt from our bank overlords -- deja vu. Next month's first released funds for the PPIP scam will be the start. Once these notes are owned by private investors, I highly doubt non-paying mortgagees will be able to sit in these homes for 14 months. Surging unemployment, grossly underwater owners and sky-high re-default rates on loan mods guarantee a flood of mortgage defaults. These WILL turn into a flood of foreclosures. No way around it.
As to the cash for clunker's effect, I'd say it's a very real risk. These cashback and financing deals (Fed mortgage purchases to lower interest rates) are stimulus. By design they simply pull demand forward. "We know you'll be looking to purchase in the x to 4x timeframe. The Gov will cut you a deal to purchase in this x period to get things moving." There is no fundamental shift in the market, it's simply incentive to buy now rather than later. Good for the 'now' at the expense of the 'later'.
Take a look at Google's stats for vehicle shopping interest on the internet to see the forward-demand effect (ignore the forecast... it assumes no contrived anomalies, which obviously isn't the case)
In my own real-world experience, in the last nine months I know seven households in my area that purchased their first home. That includes four that had been waiting and price drops/financing finally got them into the market, two couples that likely should have waited until they had a bit more job stability or cash buffer, and one couple that -- honestly -- were fiscal idiots for assuming that sort of debt given their circumstances (however, I nodded and congratulated all of them). I also know two households that walked away for their mortgage in that timeframe, and one more considering/planning it.
The interesting thing I've noticed is, aside from one couple who could arguably make a purchase (wife a recently laid-off teacher, but will likely find work somewhere), I now have exactly ZERO friends in my area who I'd consider viable buyers. Seriously, there are none left. No one I know with a stable household income of, say, $75K+ is currently renting except for the two walk-aways. A year ago a common discussion at dinners and parties was timeframe to buy. That's no longer the case -- they all have bought since then.
Now obviously my network of friends is a tiny fraction of Sonoma county, but from what I can see it's clear this market is burning through the first-time buyer inventory rapidly. The only way to replenish that first-time buyer pool is the addition of well-paying jobs. The inverse is occurring.