Art Market Report, 2006

As regular readers of these essays know, our annual “state-of-the-market report” attempts to give some perspective on the current art scene; to distinguish short-term trends from lasting systemic changes. People have a natural tendency to assume that their present circumstances—good, bad or indifferent—will last forever. Does anyone still remember the gloomy months after 9/11, when New York, as a terrorist hub, was widely thought to have no commercial future? Buying Manhattan real estate then seemed the dumbest thing you could do. And that was less than five years ago. Still, the current boom (if it can truly be called a boom) has brought forth an unusual number of Cassandras, along with the expected bulls. Stock prices remain erratic, and for over a year there has been constant chatter about a housing “bubble.” When even a popular publication like New York Magazine features an article on “the coming art market crash,” it is time to ask, “What’s really going on here?”


Art’s inherent illiquidity is both its great advantage and its greatest drawback as an investment vehicle. Even less liquid than real estate, art reacts more slowly to economic changes than the housing market, and far, far more slowly than the stock market. This means that art prices can remain unnaturally depressed even as other asset classes are appreciating, or vice versa. The art market boom of the 1980s, for example, may be considered in part a delayed reaction to the inflation of the 1970s. This boom peaked after the stock market crash of 1987 (which drove additional capital into tangible property) and ended following the collapse of the housing market in the early 1990s. On the one hand, those who buy art during the low points in such cycles have a chance to realize substantial gains. On the other hand, those who buy at the peak can find themselves unable to sell for anything like a reasonable price after the market contracts. When people start talking aggressively about art as an investment, it is often a sign that the pendulum has swung too far in an upward direction and is due to swing back.


Those who want to invest in art are advised to follow the same rules as other investors: buy low, sell high; timing is everything. But of course the hard question is: “How do you know when and what to buy or sell?” Art differs from stocks and real estate in that there are no objective business fundamentals to study. There are no financial statements or annual reports by which the long-term viability of an artist’s work can be assessed. The fact that an artist’s market value has risen stratospherically does not necessarily mean that it will continue to do so. The art market is partly driven by subjective trends, and there is nothing so fickle as taste. In past essays, we have written at length about why art, when treated purely as an asset, generally makes a poor investment, while paradoxically, art collected with personal passion and understanding is more likely to increase significantly in value over time. It is somewhat like those fairy tales about kissing a frog to find a prince: you need to appreciate the underlying essence of a thing, rather than being dazzled by surface riches. But you have to do the work. Although good dealers and advisors can help you learn, in the end you need to make your own choices and live with them, both literally and figuratively.


Another repeated refrain in our annual “state of the market” reports has been the progressive erosion of the middle market. “Middle market” is not an absolute term, but rather is relative to the price points that obtain in a given area of collecting. For example, at New York’s Outsider Art Fair, huge quantities of art (much of it not very good) are sold for under $1,500, but it is far harder to sell superior works in the $5,000 to $15,000 range. The market heats up again for significant pieces by acknowledged masters such as Henry Darger, Martin Ramirez and Bill Traylor, which can now easily command six figures. A different pricing scale applies to so-called blue-chip modern masters, with exceptional uncolored Egon Schiele drawings bringing upwards of $500,000, and great Schiele watercolors exceeding $5,000,000. Across the board, however, the weakness of the middle market can make it hard to place, price and sell average works, whether by Traylor, Schiele or another artist. The price differential between the average and the above-average is often far greater than differences in quality alone would suggest or justify. The print market, traditionally an entry-level field for novice collectors, has been particularly hard hit by this phenomenon. Signature images command premium prices, but great bargains can be found in lesser known—and sometimes even rarer—impressions by the same masters.


Essentially, there are two principal ways to make money selling art right now: a dealer can either do a high-volume business in relatively inexpensive, mostly contemporary art, or focus on marketing a far smaller number of extremely costly works. All the alleged glamour of the art scene likewise accrues to the bottom and top ends: the hot young discoveries; the eight- and even nine-figure sums expended by mysterious oligarchs. The lopsided nature of this market creates great stresses at both ends of the spectrum. With no adequate middle market to ease the passage to maturity, there is limited growth potential for young artists and those who represent them. Even a modest increase in price can send collectors scurrying off to the cheaper work of recent art-school graduates, who emerge every year like butterflies from the chrysalis of obscurity. At the top end, collectors and dealers alike have been converging on a limited supply of trophy objects, which are defined less by true masterpiece quality than by an ability to instantly telegraph a collector’s wealth and taste. Although good art is no scarcer than ever, the supply of recognizable trophy pieces has been severely diminished by this phenomenon, and prices for such works have therefore risen to astronomical heights. This top-heavy market has impaired the economic viability of the traditional dealer/expert, whose connoisseurship depends on understanding art within the broad context of the artist’s oeuvre and historical epoch. Today’s highest-powered secondary-market dealers characteristically promote a disconnected array of top-drawer properties, ranging, for example, from Munch to Warhol to Richter.


The rise of art fairs as the driving force behind the international art market has both aided and been abetted by the aforementioned trends. Competition among dealers to get into the best fairs, such as the two Art Basels (Switzerland and Miami) and the Art Dealers Association’s Art Show in New York, has become fierce. Unlike contemporary dealers, who can more easily mount curated theme shows or one-person presentations in their booths, secondary-market dealers have to make a splash with scarce trophy material. The necessity of attending multiple fairs places intense pressure on all dealers to come up with new inventory. Art fairs, it has often been noted, are the dealers’ answer to auction mania, harnessing the same competitive and speculative energy. Neither an art fair nor an auction salesroom is particularly conducive to making reasoned collecting decisions or quietly communing with art.


Of course art fairs are nothing new; the original Art Basel is celebrating its 37th anniversary this June. However, the present centrality of the art fair is a product of globalization and in part also a reaction to 9/11. Globalization has transformed the biggest fairs from regional events into widely publicized blockbusters that draw exhibitors and collectors from all over the world. The temporary dip in air travel triggered by the 2001 terrorist attacks forced more dealers to bring their wares to the collecting public, while simultaneously impressing that public with the efficiency of traveling to a single location for “one-stop shopping.” Today’s monied elite are an international class, visiting the same resorts, wearing the same cloths and collecting the same art at the same fairs. We live increasingly in a winner-take-all society, as reflected by inequitable pay scales, a decline in progressive taxation, a financially stressed middle class and, quite logically, the art market.