In the Chicago suburbs where we've been searching the past several months to buy our first home (I know the OP was addressing investment properties)  I feel like we're experiencing almost the same thing.  Most of the lower priced homes (below $300K) have been nabbed by now and what's mainly left are homes sold by trustees that require at least $40K of repair to make it comfortable to live in, tear downs, moldy REO's, etc. .  The resident sellers are not being flexible with the purchase price during negotiations...at least this is what we've been experiencing with homes listed at mid-to-high $300K's.  In terms of looking for a good deal on an investment property based on what we've seen?  We haven't come across a "steal" since people were buying just to get the FTHB tax credit in time.

This really doesn't answer your question about lower priceed investment homes vs new home buyers vs cash buyers but it will give you some idea of the market in NW Chicagoland.  

A little background: I have been using Redfin since last October to track and evaluate the housing market in NW Chicagoland.  We moved here from NC in July 09.  We want to buy something around $500 - 650 but are looking at houses priced up to $750.  Right now we are only doing open houses since we don't plan on buying until next year - around June.  We aren't firstime home buyers so the credit will not influence us. 

A lot of the $500+ market is over priced, but I think some are overpriced due to the tax burden not so much due to the value of the house.  (I am comparing prices with NC prices.)  We looked at a house in Park Ridge this past weekend, it seemed like a good price at $649; however, the taxes were over $14,000 per year.  That knocks it out of our price range.  And this tax amount is not unusual in PR.  When you consider the tax burden, the house is overpriced.  I would consider it around $100K overpriced.  (Sad thing is the buyers paid over $850K in 05.)

While visiting the open houses, I have had several interesting (and blunt) conversations with agents (they tend to open up when they realize we aren't in the market to buy today).  One agent we met was particularly frustrated with shortsales, REOs...  She actually mentioned the shadow market and how she felt is was going to be a huge impact next year for sellers.

She said she won't do any more shortsales because the market has enough non-shortsale houses that are priced the same because banks are not willing to lower shortsale prices.  They don't want the losses on their books.  Apparently the loss does not show up until the house is sold.   So they are holding out as long as they can.  She also said if she gets a offer, she does everything to make it work because the market is so dead.  

I have noticed via Redfin if a house in the $500 - $650 range is priced appropriately (at least in my eyes), it is snapped up quickly...usually within 30 days.  The rest are just sitting, sitting and sitting. 

I think there is also a glut of rental property in this area.  We are renting a newer town home (built in 04) in a nice area.  I would be surprised if our landlord is actually breaking even.  I know what she paid for it and I think she probably didn't put much down (it was an investment).  Add the taxes (~$7K per year), homeowners fees and she is probably losing a $200 - 300 per month, maybe more.