By Michael Mendelsohn
With contributions from Peter Hastings Falk

 
The fall art auction season is just around the corner, and it arrives at a particularly precarious time for many. Fluctuating results on Wall Street, an uncertain real estate market, and the recent credit crunch have made 2007 a volatile year to invest in just about everything.
 
Art and antiques collectors are not necessarily protected from the uncertainties of this market. The art market is one of the oldest in existence. People have been buying and selling art for 500 years. The first auction catalogues were published in the mid-1700s. Of course, things have changed quite a bit since then. Purchasing art and antiques have increasingly been accepted by financial managers as a valid asset class and a savvy way to diversify an investment portfolio. Contemporary art sales have been booming for years, with prices appreciating at jaw-dropping levels (ignoring a downturn in the early 1990s). But is the honeymoon over? Experts are widely predicting a regression that could take place as soon as this fall's auctions or, at the latest, by spring 2008.
 
In an effort to get an expert's opinion on what is likely to happen, I had a conversation with Peter Hastings Falk who has recently affiliated with Briddge Art Strategies as Director of Art Research and Valuation. More information about Peter appears below.

Michael Mendelsohn: Is the art market crowded with collectors and dealers who aren't prepared for a correction?
 
Peter Hastings Falk: To be unprepared means a lack of experience or simple blindness, and in this case we have both. Certainly, there are many collectors—as well as many young dealers—who are new to the art market since its last peak, in 1990. My greatest concern focuses on the contemporary art segment of the market because this is where the press finds its glamour stories. Here we see a huge and incessant push of clever marketing that promises new and higher social status to the nouveau riche. Fine art has always been attractive for the social boot-strapping it provides. Historically, this has always been a huge motivator for those new to wealth. The more recent attraction is the growing acceptance of art as a valid investment class although it is a non-traditional, even "exotic" one. Art has proven itself to be an effective strategy for asset diversification to wealth preservation...if the proper selections are made. And that's the key. Many young collector-investors are competing in the auction salesrooms side-by-side with seasoned collectors and dealers. This hybrid vigor has been growing the base of the art market, but I worry that too many new collectors rush into buying a "name" without really understanding the art itself and the historical importance—or lack thereof—of the artists. The higher the price goes for any artist, the more volatile their market becomes. But the new generation of art dealers, particularly those in the contemporary market, continue to manifest a blind exuberance. My sense is that the veteran dealers in other market segments, basically art from the mid twentieth century and earlier, have a completely different approach. They have been sobered by the several corrections that occurred during the past three decades whereas the young dealers really believe in their own bravado.
 
MM: Do you think Wall Street's current volatility and credit crunch is going to affect the fall auction market?
 
PHF: Not really. I think that more volatility will drive the collector-investor type to see art as a hedge, a diversification play, which will help stabilize their long-term portfolio.
 
MM: Is the art market immune to the type of recessions and cyclical contraction seen in the financial sectors?
 
PHF: The art market is not immune to the greater economic cycles; it just behaves with different timing. That's because the art market has always been a lagging indicator compared with the equities markets. In the past it has taken the art market about six months or longer to react and follow the major downturns in the equities markets. The art market, like other investment markets, has shown a cyclical nature. Starting in 1966, the past three cycles have lasted about eight years, experiencing peaks in 1974, 1982, and 1990. However, conditions since 1990 have been quite different from those prevalent in the previous cycles. The market is now 32% higher than it was during its 1990 peak.
 
Making forecasting more difficult is the significant new role of internationalism. Art collectors of new wealth—emerging from Russia, China, India, and Latin America—are likely responsible for stretching out the life of the current growth cycle for seventeen years and running! It's very hard to foretell when the next economic contraction will occur but it could be exhibited in the art market in strange ways. For example, contemporary art may be hit hard, causing the press to cry that the "bubble" has burst for the market as a whole. Meanwhile, we will see a contrast in other market segments where rarity and quality are still fundamental drivers. For example, early twentieth century modernism could remain quite strong.
 
MM: Could the market become flooded with people trying to "sell high" on their works amidst fear of a market correction?
 
PHF: First, the psychology is fascinating. Those who amassed large collections up to the 1990 peak are not eager to "dump" wholesale on the auction market, but when they do sell their expectations are so high that they often demand the protection of high reserve prices (under which they will not sell). As a result, we saw a high "buy-in" rate of 34% in 2006. Second, it's important to recognize that the major auction houses are also governors of supply. Even though their auction revenue has increased dramatically during the past ten years this trend was accompanied by a decrease in the actual number of auctions—by nearly half! This means the auction houses have been far more selective; so, by raising their value standards they have actually sold a smaller quantity of artworks. The result in 2006 was a record $6.4 billion in revenue—and nearly half of that was sold in the epicenter of the world art market, New York City. Recent auction results show that the failure rate at auction continues but the supply is not increasing. This indicates that because many serious players expect higher long-term value, they continue to hold, rather than sell—despite rising prices.

Artwork is by its very nature divided into niche markets. At any given time, one category of art may be hot while another is cold. Market dips and rises may be more significant for particular categories rather than detrimental to the art world as a whole, as Peter suggests. New York Magazine calls this paradigm "a constant process of mini-corrections."
 
Still, because auction markets are one of the most visible, public barometers of overall trends, the upcoming fall auction season's success or failure relative to the recent past may play a prominent role in determining whether art sales continue to climb skyward. As is the case with many pricey investments, the top tier of the market is considerably more volatile than the bottom tier. (As Artprice reported in their 2006 "Art Market Trends," the number of $1 million-plus sales totaled over 800, generating approximately $2.7 billion.) Works priced in the six-figures or above are generally subject to more market vagaries and speculation. And with some art fairs now setting minimum prices for "emerging" artists at $10,000 or above, lower tier collectors may be getting strong-armed out of the fine art market. A slow down may also trigger a time of flux for many galleries, with artists moving around more than usually as the market reshuffles and regroups.
 
Ultimately, a market correction may not be a bad thing at all for the true collectors. The fact remains that genuine, impassioned collectors purchase pieces of artwork based on their quality and aesthetic values rather than the data of its performance against a market index. People sometimes overlook the fact that there are no set regulations imposed on the fine arts market. It is largely governed not by hard facts and numerical data, but instead by intangibles such as personal preferences and eccentricities. That is, after all, what makes collecting such an adventure.
 
Knee-jerk investors are unlikely to create a false panic by selling off pieces overnight like shares in Google or Yahoo. During a downturn in the market, liquidating a collection becomes increasingly complicated because artwork is not as transparent in value as a stock holding with a stated value. But this may help weed out the pretenders who are buying art simply to keep with current trends and add another boon to an investment portfolio. When and if art sales slow, the people who will be left kicking around are likely to be the genuine art lovers, willing to weather the storm and purchase high quality pieces that are the best fit for their collection and the best match for their personal preferences.
 
As I wrote in the beginning of my book, Life Is Short, Art Is Long, collectors who purchase art purely for financial reasons and not for the passion they feel for the piece set themselves up for disaster. Artists dubbed as the next Monet, Picasso, or Warhol fall off the map every day, replaced with the next latest and greatest phenomenon. Detached speculators in art are much like the investors who took such a great fall when the dot-com bubble burst at the turn of the century. My wife Gael and I have always employed the buying strategy of investing only in pieces that evoke strong feelings and passion within us. Don't buy a painting because it happens to be the hot item this week. Buy it because it takes your breath away. If you do that, you will never feel cheated. And you will have something you can enjoy even when the market does take a turn for the worse.
 
PETER HASTINGS FALK
Since 1975, Peter Hastings Falk has been a publisher of art reference books, a professional appraiser, and an art consultant. Long recognized as one of the country's leading experts on American art, he is best known as the author of the award-winning biographical dictionary, Who Was Who in American Art. He pioneered in the publishing of auction indices tracking the international art market, and was Editor-in-Chief of the industry's two leaders, ArtNet and Artprice.com. The latter was the source for the statistics in this article.
 

Michael Mendelsohn is founder and President of Briddge Art Strategies Ltd., the premier art succession planning firm in the country. He is a world-class art collector and with his wife Gael has been recognized by Arts and Antiques magazine as one of the top 100 collectors in the US. Michael's innovative inheritance planning strategies for art and antiques assets have been featured in Trusts and Estates magazine and he has been quoted in articles in The Wall Street Journal, The Financial Times, Business Week, Forbes magazine, and Worth magazine. He is the author of Life is Short, Art is Long - Maximizing Estate Planning Strategies for Collectors of Art, Antiques, and Collectibles. He is also the author of regular monthly columns published in Art of the Times and Antiques and Fine Art. Michael is a frequent continuing education presenter on lifetime and postmortem planning strategies with a background in accounting, taxation, and philanthropic studies. As philanthropists, he and Gael have gifted selected pieces to the Museum of American Folk Art, the Philadelphia Museum of Art, and other prominent institutions.
 
The Art Advisor on the Road
On October 3, Michael Mendelsohn held a seminar on art planning strategies for the Institute for Private Investors at the Saint Regis Hotel in New York City.
 
On October 23 and 24, he will be speaking at an event sponsored by The Strang Cancer Prevention Center at Weill Cornell Medical College. This luncheon and program for collectors and advisors will be held at the National Arts Club off Gramercy Park in New York.
 
On November 3, Michael will be speaking to fine art collectors at the Santa Barbara Museum of Art in Beverly Hills, Calif. This event is sponsored by New Renaissance Art International.
 
On November 4, Michael will be presenting as part of the Intrepid Collector Series sponsored by the Ethnic Arts Council. This event will be held at Sotheby's in Los Angeles from 3 to 5 p.m. This seminar is open to the public ($25); call 310-454-7851 for more information.
 
On December 7 Michael will be speaking at Art Basil in Miami and on December 9, Michael is scheduled to speak at a seminar for high net-worth collectors at the Weizmann Institute of Science in Palm Beach, Fla.
 
The Art Advisor in the Media
Michael Mendelsohn was featured in the October 1 issue of Art and Antiques Magazine in an article titled "You Can't Take it With You," by Christopher Hann.
 
If you have questions about the disposition of artwork in your collection, the professional staff at Briddge Art Strategies is available to brainstorm with you by phone. You can share a hypothetical fact pattern with us and we will explore the planning options available that will best accomplish your objectives. We can also help you understand the issues involved in negotiating with museum personnel, art dealers, auction houses, and planned giving professionals, and the unique requirements for insurance, storage, security, and shipping. For more information about us and the services we offer, please visit us at our website at www.BriddgeArtStrategies.com, or email Michael Mendelsohn at mendelsohn@BriddgeArtStrategies.com , or call 800-216-3852.
 
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