Going, Going, Not Gone

Why does the press seem to be rooting for an art-auction crash?

How can you tell that it’s nearly auction season in the art market? When the press begins predicting an imminent crash. Right on schedule, the Wall Street Journal ran theirsthree weeks before the marquee May sales in New York City. Robert Frank, one of the Journal‘s best writers, quickly went from dollars and cents to scene-setting. “As a new wave of wealthy collectors poured into the market to fill their mansion walls,” Frank wrote, “auctions have become competitions of conspicuous consumption, filled with celebrities, hedge-fund managers and mystery billionaire bidders from Russia and China.”

It’s a great image: the last days of Rome with greedy developers spending our mortgage dollars on frivolous Jeff Koons sculptures, decadent hedgies spending hot money on cool Rothkos and de Koonings, and shady former-Communist billionaires trying to buy respectability with Renoirs. But conspicuous consumption is hardly news in the art market.

Just before the last round of auctions held in New York in November, Carol Vogel summed up the mood in the New York Times: “Beneath all the bling—the glossy catalogs brimming with lavish illustrations, the extravagant parties to lure rich collectors, the impressive exhibitions of the art and the optimistically high estimates—lurks an ominous question. After three years of speculation about a bust, will this be the moment when the art market finally crumbles?”

But it hasn’t yet. And that has left some on the art beat looking for other ways to scold buyers. Bloomberg’s Linda Sandler recently pointed to the decorum of selling pricey art while the economy tanks. “The same day that former Federal Reserve Chairman Alan Greenspan said the U.S. economy is on the verge of its first recession in six years,” she reported the evening of the Red charity auction of contemporary art, organized by Bono and Damien Hirst, “the seven pieces Hirst gave to the charity brought in about $19 million.”

You don’t usually see writers who cover, say, the price of wheat rooting for its decline. Are these writers trying to will the art market into failure? Probably not: They’re more concerned with competitive pressures. Everyone wants to be the first to identify the next crash. The art world is haunted by the asset-mauling price swoon of 1990, a double-whammy delayed reaction to the 1987 stock market crash and the 1990 recession. According to the MeiMoses index of art prices, the art market didn’t reach parity against its 1989 highs until 2003. That’s a bear market lesson that no one should forget, and with the market well into the 10th year of expansion, it’s not unreasonable to expect a crash.

Unfortunately, having a foregone conclusion that there will be a crash leaves you seeing signs of it everywhere. Frank built his Journal story around the idea that the credit crunch had caused art buyers to fall behind on their auction bills. He noticed in Sotheby’s annual report that accounts receivable had doubled at the auction house in 2007, totaling $835 million. Not a bad tell.

But because Frank was looking for cracks, he discounted the most obvious—and more pedestrian—explanation for the rise: Clients owed Sotheby’s more because they had bought more. Sales had shot up 44 percent in 2007. Maybe not enough to explain the $835 million figure, but, still, no smoking gun.

Portfolio.com’s Felix Salmon quickly jumped in to identify a flaw in Frank’s reasoning.The auction house would lose only its commission, not all of the $835 million.But Salmon added his own worry: “vast” piles of “unsellable” art that the auction houses had guaranteed at high prices.

That’s not necessarily fatal, either. Most of the guaranteed paintings do get sold—and quickly. After a sale, a dealer or a collector, sensing, correctly, that the auction house may be in the mood to work out a quick deal, will approach the house with a reasonable offer for one of the guaranteed lots that didn’t reach the minimum bid. Those late sales won’t cover the entire guarantee, but they do cut the loss substantially.

Of course, Frank could be right. Prices have risen so steeply for so long—the value of all auction sales went from $4 billion in 2004 to $9 billion in 2007, and the volume from 121,000 lots to 165,000 lots—that a correction could be what everyone needs. But a correction is different from a crash.

Already sensing this, both Sotheby’s and Christie’s have reined in their Impressionist and modern art sales scheduled for next week. The estimates remain high—sellers like to see their works well-valued—but the number of lots has been cut back by 10 percent at Sotheby’s and 24 percent at Christie’s.

Even though the specter of 1990 still haunts the market, there are some good reasons to believe the art world has changed since then. First of all, art did have a correction in 2001-02. The fall was moderate, only 13 percent in value, and the market recovered three years later. But corrections are a sign of a functioning and fluid market, not a frozen one. Second, the entire art world—not just the auction market—has grown. Dealers and art advisers talk about their community having been transformed into an industry. Today there are many more buyers—which creates liquidity—and the buyers are balanced. Hedgies were market leaders in 2006; Asian wealth made some of the biggest buys in 2007; commodity money from Russia and the Gulf States seems to be carrying the ball today.

Finally, remember that art is an asset that holds back inflation. Though it cannot be considered a commodity—it’s pretty much the definition of nonfungible—it does behave like gold, another important pseudocommodity. And like gold, which has pulled back from a spectacular run but not crashed, art has room on the downside to consolidate gains. After all, money is always looking for a safe haven, and you can’t hang gold ingots on the grand staircase of your house. So art might continue to perform until another sexier asset comes along. In other words, this boom may end not with the bang that everyone expects, but a whimper.