What Florida Shows Us About the Real Estate Market

NEW YORK ( TheStreet) -- Sick of the cold? Maybe you should buy a place in Florida, where temperatures are warm and the housing market is heating up.

The cold snap gripping much of the country is surely prodding many to dream of owning a second home someplace warm, or of moving there for good. Data show that Florida's housing market might be in a sweet spot. Prices remain low, as Florida was among the states hit hardest by the collapse of the housing bubble, but prices are on the rise, so a purchase now would appear less risky than it would have a year ago.

But Florida also offers some object lessons. Its volatile housing market demonstrates the importance of thinking clearly about the pros and cons of buying a home when you don't have to. Placing the wrong bet can be very, very dangerous.

A large portion of Florida's housing market is driven by people who don't really need to buy, such as retirees who could stay where they are in other parts of the country and second-home buyers who could wait if conditions aren't right. That makes them more fickle than people who must move for a job or growing family. As a result, Florida home prices tend to swing to extremes.

Now things are getting better. The number of housing sales that closed in December was nearly 16% higher than a year earlier, according to Florida Realtors , a trade group. And the number of pending sales, or those with signed contracts that have not yet closed, was up nearly 40%. The median sales price remained affordable, at $154,000, up about 14% from a year earlier. Nationally, the median sales price was $180,600 in November, a 10% increase from a year earlier.

Median sales prices need to be taken with a grain of salt. They don't necessarily mean the average house value has grown 14% in Florida, because sometimes it's the pricier homes that move more briskly, other times it's the cheaper ones. A year ago, sales included more foreclosed homes going for fire-sale prices.

Because of the market's volatility, anyone considering buying a retirement or second home in Florida should pay special attention to some key questions.

First, how easily can the balance of supply and demand change? On many of the barrier islands off the East Coast, for instance, there's not much room for further development, so it's unlikely a flood of new homes will depress prices in these areas. But in many areas just a few miles away on the mainland there's plenty of undeveloped land. As prices rise, developers tend to break ground on single-family homes and condos, and that new supply slows the price gains or reverses them.