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explain: 3% annual cost of renting is less than the 9% annual cost of owning
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the house that sells for $200,000 might rent for a range of monthly numbers. 3% would be $6000/yr or $500/mo. this is absurdly low, and favors renting, not buying. 9% is $1500/mo in which case buying the house to live in or rent out (as a landlord) is the better choice. at this level "paying rent" should be avoided.  i'm simply explaining the author's view, not advocating it.  a quote from the article -  annual rent / purchase price = 3% means do not buy, prices are too   high annual rent / purchase price = 6% means borderline annual rent / purchase price = 9% means ok to buy, prices are   reasonable edit to respond to chuck's comment - mortgage rates for qualified applicants are pretty tight from low to high, the 30 year is about 4.4% and the 15, 3.45%. of course, a number of factors might mean paying more, but this is the average rate. and it changes over time. but the rent and purchase price in a given area will be different. very different based on location. see what you'd pay for 2000 sq feet in manhattan vs a nice town in the mid-west. one can imagine a 'heat' map, when an area might show an $800 rent on a house selling for $40,000 as a "4.16" (the home price divided by annual rent) and another area as a "20", where the $200k house might rent for $1667/mo. it's not homogeneous through the us. as i said, i'm not taking a position, just discussing how the author formulated his approach. the author makes some assertions that can be debatable, e.g. that low rates are a bad time to buy because they already pushed the price too high. in my opinion, the us has had the crash, but the rates are still low. buying is a personal decision, and the own/rent ratios are only one tool to be added to a list of factors in making the decision.  of course the article, as written, does the math based on the rates at time of publication (4%/30years). and the ratio of income to mortgage one can afford is tied to the current rate. the $60k couple, at 4%, can afford just over a $260k mortgage, but at 6%, $208k, and 8%, $170k. the struggle isn't with the payment, but the downpayment.   the analysis isn't too different for a purchase to invest. if the rent exceeds 1% of the home price, an investor should be able to turn a profit after expenses.
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