Auctions:
Collectors Sober Up

EUGENIA LEVENSON / Fortune 26nov2007

TKO? Basquiat's "Sugar Ray Robinson" may not make its estimates this month.

When a Damien Hirst  painting failed to find a buyer at Sotheby's London auction last month, it sent a signal through the collecting world that the white-hot contemporary art market was finally starting to cool. This month's auctions in New York—the fall art season's major event—will he an even more critical barometer. Some arc calling the top in advance. "Prices have peaked," says Eli Broad, the KB Home founder whose vast 20th-century collection includes works by Jeff Koons and Ed Ruscha. "It's a period when everyone can sober up."

Few expect a crash like the one that followed the last art bubble, when prices fell 65% from 1990 to 1995. But the Hirst miss and some other weak sales—a Francis Bacon nude barely exceeded its low estimate—suggest the days of irrational exuberance may be over. Or as London dealer Kenny Schachter puts it, "It's the dawning of a new era of selectivity."

That would be a marked change from the triple-digit gains, indiscriminate bidding, and flipping that have characterized the art market in recent years. Stoked by an influx of new buyers chasing trophy pieces with hedge fund cash, the market has exploded. Since 2002, returns

for postwar art have beaten the S&P 500 with compound annual returns of 20%, according to the Mei Moses tine art index. Even minor works rose with the boom, and pieces bought on the primary market were rushed to auction with big markups. "I often scratch my head in the auction room," says Mary Hoeveler, head of Citigroup's Citi Art Advisory Service.

One thing lessening the odds of a '90s-level bust is the size and breadth of today's market, with big-league buyers from Russia, China, and the Middle East. In a nod to growing Russian clout, über art dealer Larry Gagosian opened his first Moscow show last month.

So who will feel the pain? The mid-market pieces—minor works by heavyweights and those from less established artists—look most vulnerable. Broad, who anticipates a marketwide correction, predicts that work valued below $5 million will be hit hardest. "That's where you'll have the largest number of buyers [for those works] affected by the economy," he says.

The upside: plenty of opportunity for long-term investors. "Collectors are looking forward to a correction, so it becomes a real market again, not just a billionaires' game," says Hoeveler. Good news for the buy-and-hang crowd.

source: p.41 12dec2007