Oversupply - December 09

As I was ruminatively sipping my coffee at Zumi’s, my lifesaving local coffee shop, a question pushed its way into my mind. Zumi’s Kathmandu dark roast can do that. What on earth, I wondered, is happening to all those unsold antiques?

For the past year and more, dealers have been complaining of slow, or no, sales. Buy-in rates at auction houses have been at historic highs. Private owners are hanging on until the market improves. There are a lot of unsold antiques out there.

I’ve had two examples from the private sector recently. A woman wanted to get her money out of an English oak lowboy she’d bought in London in the 1990s. I showed her what a similar example had fetched at auction in Boston, and offered her twice that. It was still short of what she wanted, and she decided not to sell. The other example was a desk that I didn’t want, anyway, but when I told the owner the sort of prices that desks like his were selling for, he, too, decided that he didn’t need to sell it that badly.

For the first time since we’ve been antiques dealers, it appears that supply is greater than demand. At the very topmost reaches of the market, of course, supply can never meet demand – masterworks really are rare objects. But, taken as a whole, the middle and upper-middle appears to be oversupplied, and I suspect that this will take some time to work its way through the system.

Of course, this may not be uniformly the case – there’s nothing uniform about the antiques business – and I may be generalizing too far from our own experience as dealers in middle-class furniture, probably the softest segment of the whole market. But because this market segment is the one I know best, it’s where I’m going to focus, and I’ll leave it to those of you in other segments to decide how well my remarks apply to you.

I’m confident that this pent-up supply actually exists, but I’m not quite as confident about the pent-up demand that hopefully will match it. I think demand will lag supply for some time to come. If I’m right about this, next year will see a smaller market than it was in 2007 with a longish period of low, but stable, prices, followed by a gradual recovery. The recovery will be slow, because as prices creep upward, they’ll attract more antiques onto the market, which will keep the price-rises slow and steady. This will actually be a good thing, for it will avoid the boom-and-bust cycle that many segments of the art and antiques markets have already suffered (and which, by the way, will be the subject of my January column).

The timing of our recovery will be set by the state of the middle class economy. In recent weeks, the Wall Street Journal has been reminding us often that there has never been such a gap between Wall St. and Main St. Its contributors wonder if the old adage “Stocks first, jobs next” will apply this time. I take their point. Wall Street buys at the top of the antiques market, Main Street in the middle. The top is showing some green shoots of recovery, the middle far fewer.

So there are three factors that negatively impact this middle market: oversupply, Main St. woes (especially unemployment) and a housing market on life support. None of them will disappear overnight. Fortunately, there are signs that customers are beginning to adapt to this new reality. For them, the new reality is that buying has never been better. If they have the taste for antiques, they certainly have the opportunity.

Current values
In his October editorial of the British journal, Antique Collecting, John Andrews makes some remarks about the scene over there that seems equally pertinent over here.

“It is encouraging to learn that Ian Stewart, the chief economist of the esteemed accounting and consulting firm Deloitte’s, recently consulted our ACC Antique Furniture Index, matched its movement over the last six years with the rising costs of newly-made furniture, and came to the conclusion that antique furniture really is greatly undervalued. In addition to its functional role he concluded that antique furniture should be bought as an asset that is cheaper and better made than new. It is also an illiquid one that generally avoids the price swings seen in financial markets, and a hedge against future inflation caused by profligate Government printing of money.”

We can take Stewart’s analysis a little bit further. The price of an antique (as of anything) is made up of two components – use value and exchange value. Use value reflects the cost of performing its function: as Stewart points out, the cost of antique furniture is now lower than new, which means that the use value is higher. Exchange value is what people are prepared to pay above use value for intangibles such as beauty, prestige, rarity, history and so on. Use value remains relatively constant. The rapid fluctuations in exchange value are what cause boom-and-bust cycles: “irrational exuberance,” to coin a phrase, is when exchange value gets out of control. But right now, the buyer of good, middle-class antique furniture gets all of his exchange value for free: it costs nothing above use value. Customers are not fools. Many have realized this already, and as this realization spreads along Main St., they will come back to us and start buying again. Put simply, the new reality is that use value is higher than cost, and exchange value is free.

In these new conditions we need to follow Ian Stewart in rethinking the investment value of antiques. With a booming stock market, with its mentality of buy-sell-take-a-quick-profit, the illiquidity of antiques was a major impediment. The selling cost of an antique could be 30 to 50 percent, so it had to be kept for a long time for its appreciation to cover that cost. And in a booming economy, long-term thinking was a no-no. But the boom was caused by hyper-liquidity, exchange value out of control, use value off the radar. And the country has soured on all that.

An antique stands in diametric contradiction to everything that produced our recent boom-bust. It cannot be bundled into a package of toxic assets with no use value. It just sits there solidly. The closer its price to the cost of producing a new, equally well-made equivalent, the better it will serve as a hedge against inflation. The higher the proportion of use value in its price, the better long term investment it will be. People who fear inflation should be buying antiques right now. People who think long term should be buying antiques right now. Antiques are perfect for our new reality.

Collecting and furnishing
Collectors know this. If they had put their collecting on hold, it was for economic reasons. And now economic reasons are bringing them back. Collectors are passionate about the objects of their desire. Their aim is to accumulate and keep; profit-taking is a concept that never enters their minds, but good value is very important to them. Serious collectors always know the market. They follow auction results closely; they read every price-tag in the booth. Right now, the market is in their favor, they can buy great things at around 30 percent less than a couple of years ago. They also realize that prices have stabilized and will not go any lower: what they don’t know is how long these low prices will last, so they are beginning to take advantage of the market, and buy. There have been clear signs of collector-buying at recent shows, at shops and websites, and at auctions.

Furnishers are a different matter altogether, and there are, as yet, fewer signs of their return. By furnishers, I mean people who enjoy having a variety of antiques in their home and who really want their décor to include antiques. But if they are passionate, it is about the interior design of their houses, not about the antiques themselves. I don’t mean to use the word “furnisher” disparagingly: furnishers are a very important part of our business. In fact, I believe that the overall health of our business depends more upon furnishers than collectors. Antiques dealers and collectors tend to be kindred spirits, so it’s easy for dealers to overestimate the importance of collectors to the business as a whole. Furnishers are the main customers of Main St. Right now, their stock portfolios may be better, but they’re not moving house, they’re not remodeling, they’re not doing anything to stimulate them to refresh their furnishings. Let’s hope and pray that when they do, they will maintain their taste for antiques. For now, they are content to live in their homes furnished as they are. This will change once the economy of Main St. picks up, but until then, it won’t.
Sure, we’re recovering – spottily, unevenly, but we are recovering.
John Fiske

P.S. You can help Main St. recover: pick three local small businesses that you would really miss if they failed, and make sure you spend $50 a month in each.

John Fiske