@Alvin Sylvain I totally agree. It's very perplexing phenomenon, but then again, what isn't these days... :/
My GUESS as to what is going on... I believe what we're seeing, prices going up due to increased demand / short supply and foreclosures in the private market going up, is simply a reflection of A) interest rates, B) halted foreclosures in the government-backed market, and C) the K-shaped economy. It's a little hard to explain my theory, but let me give it a shot. :)
First the K-shaped economy: if you look at the white-collar economy, we're nearly at full employment. However, in the lower income / blue collar / service economy, we are seeing tremendous amounts of pain. You'd expect foreclosures, then, in the bottom half of the income spectrum. Makes sense. However, at the same time, you are having interest rates driving prices higher. Also, foreclosures in the larger government-backed part of the market are on moratorium, so any housing supply that might feed into the market during any other year is basically frozen solid, which helps to create a housing shortage and therefore a spike in prices.
Furthermore on your question of why a buyer wouldn't be able to cash out, I would expect that in SF or NYC, where prices are down YoY so there are plenty of underwater mortgages, but my understanding is that these foreclosures that we're seeing are mostly in FL, SC, and around the south.
There are probably local dynamics that play into every market, from LA to Portland to NYC. But in general, I think these are the dynamics in play that are creating rising prices and short supply in an otherwise horrible economy. Feedback, positive or negative, on my theory much appreciated.