(Bloomberg). The steep rise in mortgage rates is causing a drop in demand for second homes.

According to a report from, the mortgage-rate lock for second homes was reduced to their lowest level in five years after a buying frenzy. Redfin (NASDAQ:) 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.   

The pandemic saw enthusiasm for vacation homes rise as more remote workers sought out space and sunshine. However, the slowdown in growth has been caused by rising prices and fierce competition due to a limited supply.  

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.”

Redfin stated that the peak of vacation home demand was March 2021. That was two months after Freddie Mac’s average 30-year mortgage rate hit a record low of 2.65%. The average borrowing cost has risen by 4.67% since last year.

Even primary-home buyers are being forced to stay off the front lines by this rapid rise at a moment when inflation is hurting them. These challenges have been especially difficult for first-time home buyers, who are finding it hard to find properties that they can afford. The tight supply has led to bidding wars which push the prices above their reach. 

The National Association of Realtors reported last week that contracts to purchase previously owned properties fell for the fourth consecutive month due to inventory restrictions. 

Another obstacle for potential buyers of vacation houses is the possibility that there will be an increase in fees. This could include an increase from 1% to 4 percent on second-home loan backed Fannie Mae. Freddie Mac (OTC:). This could add up to $12,000 on top of a $300,000.00 mortgage. The payment can be made upfront or it can be rolled into the loan.

Learn more: Rising U.S. loan fees can cause a boom in private MBS markets

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. You can drive about three hours to reach both the beaches and mountains from the city, which makes it a favorite 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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