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Five Theories On Why the Art Market Can't Crash

And why it will anyway.

Going fast: Earlier this month, the Armory Show in New York was a blockbuster; much of the most sought-after work was sold even before the holders of $1,000 tickets had a crack at it.  

Walk around Chelsea these days and you can practically hear money buzzing in the air. Powerhouse galleries such as Matthew Marks and PaceWildenstein have extended their empires with extra showrooms. Younger guns like Leo Koenig and Casey Kaplan are graduating into grander spaces. And almost every weekend, some former gallery director is going into business for himself. It’s not just Chelsea. The whole contemporary-art market has shifted into overdrive. Playing to today’s competitive collectors, the Armory Show’s opening gala earlier this month offered three-tiered access: $1,000 to enter the art fair at five o’clock, $500 a half-hour later, and $250 for seven. But by five, the booths of the hot dealers had already been besieged by dozens of collectors and art consultants, invited in at noon by their clients; many works by sought-after artists were either sold out or held on reserve (some on “double reserve”).

Likewise, during last year’s auctions, the Postwar and Contemporary sales started to truly rival the historically dominant Impressionism and Modern categories. Granted, much of that dollar volume is driven by dependable heavy hitters such as Roy Lichtenstein, Andy Warhol, and Willem de Kooning. But the younger end of the spectrum has even more momentum. Last October, for example, Christie’s capitalized on the Frieze Art Fair’s bringing international collectors to London to create a bona fide contemporary-art event. Two paintings, by Tim Eitel and Matthias Weischer of Germany’s “Leipzig School,” created a presale sensation. You could have bought such works for as little as $4,000 a few years back, before the Leipzig School hype started building, and neither artist had ever come to auction before the Frieze fair. There was some surprise when the Eitel sold at $212,000, three times the high estimate. But the stunner was Weischer. Estimated at $31,000 to $38,000, his painting soared to $370,000, instantly making it shorthand for everything overblown in the current market.

Encouraged by such rocket-fueled price increases, competitive collectors and dealers now scour both exotic places (Poland and China are current favorites) and local art schools for new names; in January, veteran Upper East Side dealer Jack Tilton’s show of students cherry-picked from the M.F.A. studios at Yale, Columbia, and Hunter sold strongly, despite the aggressive pricing for what was by definition still student work.

To second-generation dealer Marc Glimcher, president of PaceWildenstein gallery, the climate seems all too familiar. “Like the rest of society, the art market has cycles,” he explains. “The art market comes to the fore when there’s a lot of discretionary spending. Collectors are competing with each other. The prices of art accelerate. The age of the most expensive artists drops. There’s a great flowering. Schadenfreude starts building up. And then it crumbles erratically.” Such public pessimism is rare among dealers. Because if art itself is built on the image, the idea, and the object, the art business hinges on words—the spoken and written seductions that persuade buyers to pay ever-higher sums. Some words are spoken only in the back room of the gallery, where commerce is quarantined to keep it from sullying the art out front. Here are three, in order of increasing nastiness: Correction. Contraction. Crash.

You won’t see them, of course, in most coverage of the contemporary-art market. Instead, dealers recite a market mantra: Business is strong, driven by the globalization of the market. The New Economy’s collapse and September 11 created only a comparative hiccup in sales. Art has become a luxury good, coveted by the surging crowd of new wealth in search of an identity for itself. But in the back room, the thinking is not always so optimistic. Even Zach Feuer, among the star dealers of his generation at age 27, has prepared for the worst. Despite his success, Feuer runs harsh projections before any capital expenditure. “I’m checking, How do things look if sales drop 50 percent? ” he explains. “How about if they drop 80 percent?’”

In the art world, there’s a clear delineation between those who experienced the last crash, in the early nineties, and those who didn’t. “This market is fueled by collectors who have never been through a correction,” says art adviser Darlene Lutz, active since the eighties. “The generations who did are watching this with disbelief. It’s like teenagers who have unprotected sex thinking they’ll never get pregnant. And then, whoops . . . look what happened!”

Yet the history of art-market crashes is no more a secret than the basics of sexual contraception. Even a casual student of art-world history can recite the early-nineties fall of Soho: the paintings by art stars Julian Schnabel, Sandro Chia, and Enzo Cucchi turning unsellable; the legions of posh galleries shuttering their doors; the general sense of despair and gloom settling over the entire neighborhood. In 1993, the New York Times writer N. R. Kleinfield tested the desperation of Soho dealers. Haggling like a man buying a used car, Kleinfield consistently extracted 20 percent reductions, the discount level reserved today for major collectors and museums. At Leo Castelli, he was offered what had been only a year earlier a $400,000 Lichtenstein sculpture for $270,000.