Art Market - Strong or Weak Part II

Yesterday I posted on a NY Times business day section article (click HERE for yesterdays post) on the potential weaknesses of the overall art market beyond the spectacular trophy and record prices recently seen from the NY sales. I mentioned there was a rebuttal article in Reuters questioning the conclusions of the NY Times piece that overall, the art market was not strong, or was tepid as the title indicated

As appraisers we need to be aware of market condition and trends.  As there will always be differing opinions and conclusions as to the overall art marketplace as well as the various segments. Appraisers need to be aware of what is happening, and how the market is reacting to the economy and how sales are being interpreted.

Reuters reports

Against the problematic S&P 500 line, Stewart has charted the even more problematic Mei Moses index, a creature of massive survivorship bias. The Mei Moses index looks at auction pairs: works of art which have been sold at auction twice. This method gives a very good idea of what has happened to the value of any given work of art over time, but it’s a very bad way of determining what has happened to the art market as a whole, since the kind of works which get auctioned multiple times are decidedly not representative of the broader art world. The auction houses tend to want only the hottest art, and then on top of that the index is going to be massively weighted towards the kind of work which gets bought and sold quite frequently — exactly the areas where you might find a speculative bubble.

Still, if you have to try to quantify what’s happening to the value of art, the Mei Moses index is one of the least bad ways of doing so. The real problem here is the way in which Stewart directly compares the Mei Moses index with the S&P 500. If you just saw the red line on its own, you would be quite impressed: it shows prices doubling over the course of a decade, which is (or should be) pretty amazing for art. After all, we’re talking about objects which haven’t changed for, in some cases, centuries: why should they double in value now? Very few other physical objects can be expected to do such a thing; if houses do it, then that’s prima facie evidence to start getting worried about a nasty bubble.

More to the point, the S&P 500 is an investable index of publicly-traded stocks, representing trillions of dollars of wealth. It’s designed as an investment vehicle, and millions of people around the world put their money into it just because they think that’s the best purely financial investment decision they can make. The Mei Moses index, by contrast, is not investable at all, and simply represents the degree to which art-lovers’ art collections might have appreciated in value over time. Art is not an investment in the way that the S&P 500 is, and all direct comparisons of the two have a way of invidiously changing the way we look at and think about art in general. Aesthetic value becomes subsumed into financial value, and the act of buying art becomes a subset of investing, which it never should be.

In any event, it’s pretty hard to see how a market which has doubled in a decade can be considered to be “tepid” and “in a doldrums”. So, how does Stewart do it? First, he says that “many works are selling near or below their low estimates or failing to sell at all”. This is a statement which is always true. After all, the estimates claim to be the auction house’s best guess of what a piece is worth, in today’s market; they’re also a way in which the auction houses try to persuade sellers to give up works for auction, and try to persuade buyers that the art in question is worth lots of money. In other words, there’s a strong upward bias to auction estimates.

Here’s Randy Kennedy, for instance, reporting on the way in which Christie’s is estimating the value of the works in the Detroit Institute of Arts: it’s a rare explicit admission, by the auction house, that its estimates are generally significantly higher than fair market value.*

The auction house determined the fair market value of the works, comparing them to similar ones that have sold recently. But Christie’s emphasized that auction estimates for the Detroit works — which auction houses use “to attract maximum bidding interest” — could be far different; such estimates would most likely be higher.

The inevitable result of setting estimates so high is that quite a lot of works will always sell at the low end of the estimated range, or not at all. What’s more, selling art is hard: we’re talking about unique objects, here, and an attempt to match each of those objects, individually, with the person who wants it the most and is willing to spend the most money to acquire it. An auction is one way of trying to do that, but it’s far from perfect. If the ideal buyer doesn’t hear about the auction, or doesn’t have the money on the day of the auction, then the resulting difference in price can be substantial.

Source: Reuters