(Bloomberg) -- Demand for second homes in the U.S. is plummeting as mortgage rates climb steeply.

After a pandemic buying frenzy, mortgage-rate locks to buy second homes dropped last month to the lowest level since May 2020, according to a report by Redfin Corp. While demand was still up 35% from February 2020, before Covid-19 hit the U.S., it was significantly lower than the previous month’s 87% jump, the brokerage said.   

Enthusiasm for vacation homes shot through the roof earlier in the pandemic as remote workers, untethered from the office, sought more sunshine and space. But escalating prices -- driven by fierce competition for a tight supply of listings -- and a recent surge in mortgage rates have slowed the boom.  

Those two factors “are hitting the second-home market much harder than the primary-home market,” said Redfin Chief Economist Daryl Fairweather. “That’s largely because vacation homes are optional. People don’t need a second home, but they do need a place to live.”

Vacation-home demand peaked in March 2021, Redfin said. That was two months after Freddie Mac’s average 30-year mortgage rate hit a record low of 2.65%. Borrowing costs have shot up since the end of last year, landing at 4.67% this week.

The rapid increase has pushed even some primary-home buyers to the sidelines at a time when inflation is hurting their budgets. The challenges are particularly tough for first-time buyers who have struggled to find affordable properties as bidding wars for the tightest supply of listings on record push prices out of reach. 

Contracts to buy previously owned homes declined for a fourth straight month in February as the inventory shortage restricted deals, the National Association of Realtors said last week. 

Would-be buyers of vacation homes face another potential obstacle: a fee increase ranging from an additional 1% to 4% on second-home loans backed by Fannie Mae or Freddie Mac. That could tack on as much as $12,000 to a $300,000 mortgage, payable upfront or rolled into the loan.

Read more: Risky Private MBS Market to Get a Lift From Rising U.S. Loan Fee

While the increase officially doesn’t take effect until April 1, the fees have been priced into loans for almost a month, so that may have deterred some buyers already, according to Rebecca Richardson, a broker at Wyndham Capital Mortgage in Charlotte, North Carolina. The city is about a three-hour drive to both the mountains and the beach, making the area a popular vacation-home spot.

Combined with rising rates, the fee increase “has definitely dampened the enthusiasm” among her clients, Richardson said. “It’s becoming a much weightier decision versus last year.” 

That doesn’t mean the second-home boom is over, especially for people who can pay cash and whose remote-work plans have solidified.

“Still, people are buying up vacation homes more than they were before the pandemic, as work remains more flexible than it used to be,” Fairweather said.

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