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Going, Going, Not GoneWhy does the press seem to be rooting for an art-auction crash?

By Marion Maneker
Posted Monday, April 28, 2008, at 12:28 PM ET

(Continued from page 1)

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.

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Marion Maneker is publisher of the Art Market Monitor, a newsletter about the auction market.
Photograph of Étude Pour la Femme en Bleu at Sotheby's by Cate Gillon/Getty Images.
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