Art Market Report, 2001

As regular readers of these essays know, summer is the time when, in tandem with our annual Recent Acquisitions exhibition, we issue our "state of the market" report. Over the past year, a number of marketplace changes that were incipient twelve months ago have begun to crystallize. With the indictment (not coincidentally, one must assume, a week before the big May sales) of the former chairmen of Sotheby's and Christie's, the other shoe has dropped in the U.S. Government's investigation of collusion between the two auction houses. However, these pending criminal cases may well have less impact in the long run than the related civil suits, which have already saddled Sotheby's and Christie's with a cumulative debt of over $500 million in penalties owed to their clients. Phillips Auctioneers, historically a poor third to its two competitors, did not hesitate to take advantage of their financial woes by using hefty guarantees to snag a number of choice lots for its recent spring sales.


Dealers know that major works of art are sold all year long, but the semi-annual New York auctions, for better or worse, often function as barometers of overall market conditions. In view of the flagging American economy and turbulent stock market, a sense of uncertainty has pervaded the art world for the last several months, since everyone has been wondering whether we are on the brink of a full-blown recession. A parallel question is whether investors fleeing the stock market will now flock to art, as happened after the 1987 crash. It is, however, difficult to draw any sweeping inferences from the latest round of auctions, because they were influenced as much by the aberrant fiscal positions of Phillips, Sotheby's and Christie's as they were by external market factors. What these auctions portend, rather, is the undermining of salesroom tactics that worked well enough in the bullish '90s, but are less well suited to a period of stagnation.


The high prices achieved at almost all the May auctions, particularly for contemporary art (a comparatively speculative field that is generally considered very vulnerable to economic downturns), indicate that there are still plenty of collectors willing and able to spend large sums of money. The relatively high percentage of "bought-in" (i.e., unsold) lots in the big-ticket Impressionist and Modern sales is thus less an indication of market softening than the result of exorbitant estimates and greedy reserves (the minimum prices set by sellers). Auctions are most impressive in a rising market, since reserves that in retrospect appear modest can allow lots to reach their proper levels. Success, in art as in the business world, is often judged by comparing outcome with expectations, and this is as true when works fail to meet their reserves as when they exceed them. With three auction houses competing voraciously for consignments, and Phillips pumping huge quantities of cash into the bargain, estimates and reserves for many of the top Impressionist and Modern works this spring approached or even surpassed retail levels. In playing this game, it is easy to overshoot the mark; if the reserve is set too high, there is nowhere to go but down.


The substantial buy-in rate at the recent sales exposes the fatal flaw in the auction houses' long-cherished goal of becoming full-fledged retail players. The retail market, traditionally the purview of dealers, operates on the premise that at any particular historical moment, every work of art has its correct price, and that, given enough time, this price will be achieved. If a dealer initially miscalculates in setting the price, adjustments up or down can easily be made. Lack of time pressure works in the interest of both buyer and seller, helping each to get a fair deal. The "now-or-never" aspect of auctions, on the other hand, occasionally prompts collectors to pay foolishly high prices. Auctions also entail a far greater risk for the seller than is found in a true retail environment. Since the fate of every lot ultimately comes down to the will or whim of just a handful of collectors, a fluke of circumstance that prevents one or more of these collectors from participating can easily depress the result. The only protection a consignor has against getting burned in this fashion is to set a substantial reserve. But the higher the reserve, the greater the chance that there will not be sufficient bidders to meet it. Bought-in works are sometimes sold after an auction, but at least as often they linger on the market, tainted by their public shaming.


Even in the best of times, auctions foster feast-or-famine situations. Big winners (sellers who reap windfalls and buyers who get bargains) will by definition always be matched by losers (buyers who overpay and sellers who net less than wholesale). Qualities peculiar to the boom of the late 1990s added elements to this equation that exacerbated the dichotomy between high- and low-end. During this period, many segments of the American economy experienced a parallel bifurcation: the gap in income between top achievers (executives, investors, entertainers, athletes, etc.) and the average worker grew enormously, and prices of luxury goods rose accordingly. In areas most affected by the boom, such as Manhattan or Silicon Valley, basic middle-class necessities like housing became affordable only to the wealthy. Naturally, the pooling of extreme wealth was reflected in the art market as well. Prices for what were perceived as top-quality works rose disproportionately to everything else. "Selective" became the euphemistic adjective of choice for a market that made less and less sense.


The mantra of "selectivity" was the art-world's response to the excesses of the late 1980s. However, that decade's boom was actually a lot more rational, at least at first, than most people today acknowledge. Art (like real estate) tends to respond comparatively slowly to economic fluctuations, and thus art prices were slow to catch up with the horrendous inflation of the 1970s. In the early 1980s, collectors were in effect paying pre-inflation prices with post-inflation dollars. This was one period--probably unique in our lifetimes--when buying art from a pure investment standpoint truly paid off. Appropriately, the proverbial rising tide lifted all ships, and there was a general across-the-board increase in art values during the '80s. However, prices eventually spiraled out of control, and in the '90s it became evident that too many collectors had spent ludicrous amounts for second-rate works. Henceforth, it was decreed, "quality" would rule.


While this sounds good in theory, the unnerving truth is that in reality, "quality" is an extremely elusive concept. Particularly at a time when academics were eschewing the whole notion of quality on account of its elitist connotations, collectors in the 1990s had very few objective benchmarks to go by. Beyond the often self-serving hype of dealers and auctioneers, there was a tautological tendency to equate quality with price: a painting that fetched a record sum had to be great, or it would not have achieved such a result. No less excessive than those of the late 1980s, the highest art prices of our latest boom period tended to be much narrower in focus: they were "selective." The problem we face today is that this increasingly top-heavy pricing structure is beginning to cripple the entire art market. It becomes impossible to extrapolate downward from the top. If a "great" painting by artist X sells for $1,000,000, that does not necessarily mean that a painting half as good will bring $500,000. The secondary work may well bring no more than $200,000. And if its owner insists on getting $500,000 or perhaps even $1,000,000 (because, after all, just about every seller thinks his or her collection is as good or better than anyone else's), the picture will not sell at all. If, on the other hand, potential sellers are given realistic evaluations, they may simply decline to sell. The recent boom was special in that it did not invariably draw more works to market, and sporadic shortages of material have further skewed relative values.


It has become surprisingly difficult to define the market for works of secondary importance (which after all comprise the vast majority of all art). Like the denizens of Garrison Keillor's fictional Lake Wobegon, where every child is above-average, collectors and dealers eschew anything deemed less than extraordinary. There is, additionally, a certain economic logic to this philosophy. Despite its veneer of wealth and glamour, the art business does not generate particularly generous profit margins. It is well known that it takes as much effort to sell a $100,000 work as a $1,000,000 one, but the commission on the latter is far greater. Partly in response to the recession of the early '90s, many art-world professionals tried to boost the bottom line by concentrating their energies on very expensive items. Sotheby's thought (incorrectly) that it could reduce overhead by channeling lesser consignments to the Internet, and Phillips, even now, is trying to position itself as an exclusive high-end art boutique. However, these strategies are reaching their natural limits. The top of the market is thin, and the vast middle perilously under-served. What many auctioneers and some dealers fail to comprehend is that the peak of the market pyramid rests on the center, and that if the center collapses, the top will eventually go with it.


Just as the Internet stock bubble had to burst, the art market is now due for a correction. Corrections are not always pleasant, but they are necessary. We all hope for the clich├ęd "soft landing"--and if we are lucky, we will get one. Regardless, however, of what the next few years bring, it is to be hoped that the art market will be a healthier, more solid environment after this period of adjustment than it was before. In the meantime, the good news is that there is still plenty of art to be had, for collectors in just about every income bracket. But collecting cannot be done by proxy, or according to prescribed rules. It is, rather, a process of discovery and learning that is unique to each individual who undertakes it. And while money may be a factor, the primary rewards of collecting are intellectual stimulation and pure visual enjoyment.