A Look at How the Art Market Is Faring

With the U.S. economy faltering, there's some talk of a bubble in the world of art investment.
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The spring art auctions have set new records, but also started to show some cracks in the foundation. The results have left collectors, auction houses and art enthusiasts wondering whether the boom has gone bust.

A Francis Bacon painting fetched $86.3 million at a

Sotheby's

(BID) - Get Report

auction Wednesday night, making it the most expensive piece of contemporary art ever sold. That auction set records for 17 other artists -- and that figure doesn't include records for Claude Monet ($41.5 million), Alberto Giacometti ($27.5 million), Auguste Rodin ($19 million) and Joan Miró ($17.1 million) at a Christie's auction earlier in the month.

Still, more than half of the lots sold in the contemporary evening sales sold below the average estimate, according to

ArtTactic

, an art-market research firm.

Several pieces -- including those by Picasso, van Gogh, Monet and Matisse -- did not reach minimum estimates, and a hefty portion of works were left unsold. Bidders were sparse even for the record-setting lots, indicating fewer, more selective buyers.

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Just as the fine-art market was posting a record $9.2 billion in sales last year, the U.S. credit crisis and housing downturn began to take its toll, sending chills through the global economy. Art enthusiasts had hoped that countries with emerging wealth and fresh talent would be the bright spots that prop up the traditional powerhouses of the U.S. and Europe. There was evidence that such a trend would emerge: China overtook France as the No. 3 market in art revenue last year. Auction houses sharpened their focus there, as well as in India, Russia and Dubai.

Still, the art market is certainly showing signs of stress. The United Nations warned on Friday that the global economy is "teetering on the brink" of recession. With high prices for food and oil, tight credit markets and waning consumer confidence, it's unclear how fast or hard the art market will follow.

That the auctions were not a complete bust was "a great sign of relief," says Anders Petterson, managing director of ArtTactic. "However, the question, 'When will the art market fall?' won't go away. So, every auction season will be a test -- putting enormous pressure on the market ... It's when these expectations are no longer met, that we could be in trouble."

Michael Moses, a former New York University professor who developed an art-price index with colleague Jiangping Mei, says that if the art market follows its historical pattern, it still has further to grow. During the last art boom, from 1985 to 1990, the market grew at a compound annual clip of 30%. That was followed by a precipitous drop of 65% over the next five years.

By comparison, the market has grown at an annual rate of 20% over the last five years, indicating that it could expand further before it contracts, Moses says.

Still, "it's anybody's and everybody's guess to what the history and future relationship is," he notes.

Once a downturn begins, prices can tumble quite quickly and sharply. Here are some important tips for art enthusiasts to keep in mind when deciding whether to buy or sell in today's market:

1. Quality is key

. Dazzling works by renowned artists -- from Picasso to Warhol -- will be valuable, even if prices drop.

However, "if you are not an owner of a major work by the right artist, you are likely to find few takers," says Petterson. "The art market has narrowed its focus, and what we see in auction today is a much more blue-chip contemporary art, or exceptional, rare pieces. It is this quality supply which holds the market up."

2. Contemporary pieces are especially hot in today's market

. (That means works produced in recent decades, rather than centuries.)

The outlook is strongest for works from the 1950s through the 1970s by Western artists who had "strong curatorial and art historic support, but

were neglected by the market," Petterson says.

Some top names from 2007 and 2008 auctions so far: Francis Bacon, Andy Warhol, Tom Wesselmann, Mark Rothko, Takashi Murakami, Gerhard Richter, Robert Rauschenberg and, of course, Pablo Picasso, among many others.

3. Works by emerging artists are less expensive and have room to appreciate

. For instance, many Chinese artists have seen the value of their work increase tenfold over the past few years.

Among rising stars in the Chinese realm are Zhang Xiaogang, Yue Minjun, Zeng Fanzhi and Chen Yifei, whose works recently set personal records near or below $5 million.

Petterson also suggests honing in on areas like India, Pakistan, the Middle-East and South-East Asia.

4. Beware of the speculative bubble

.

Those who have been buying up "cheap" works of art for tens of thousands of dollars and selling them quickly at a relatively high profit may not be able to do so much longer. Auction houses have become more selective and such "exceptional price levels are starting to look like ceiling prices," according to Artprice.com's 2007 market review.

5. Pick the right middleman

.

It's important to cultivate relationships with dealers and galleries that can find a buyer if the auction market has dried up, Petterson says. Similarly, the right connections are crucial to acquire works at the right prices when you're building a collection.