Ich wundere mich über die laute Musik im Wohnzimmer.

Because sich wundern is usually used as a reflexive verb in this meaning.

• ich wundere mich = I am surprised / I wonder
• du wunderst dich
• er wundert sich

The reflexive pronoun changes with the subject.

Without the reflexive pronoun, wundern usually means to surprise someone:

• Das wundert mich. = That surprises me.

So:

• Ich wundere mich über ... = I am surprised about ...
• Das wundert mich. = That surprises me.

Not always. This is an important false-friend issue.

In Ich wundere mich über ..., sich wundern usually means to be surprised at/about.

English wonder often means to ask oneself or to think about something. In German, that idea is more often expressed with sich fragen:

• Ich frage mich, warum ... = I wonder why ...

So:

• Ich wundere mich über die laute Musik. = I’m surprised about the loud music.
• Ich frage mich, warum die Musik so laut ist. = I wonder why the music is so loud.

Because sich wundern commonly goes with über + accusative to show what you are surprised about.

So the pattern is:

• sich wundern über + Akkusativ

Examples:

• Ich wundere mich über das Wetter.
• Wir wundern uns über seine Reaktion.

In your sentence:

• über die laute Musik

That whole phrase means about the loud music or at the loud music.

Because laut is an adjective placed before a noun, so it needs an adjective ending.

Here:

• Musik is feminine
• the article is die
• the case is accusative
• feminine accusative with die takes the adjective ending -e

So:

• die laute Musik

A few comparisons:

• die laute Musik = feminine
• der laute Lärm = masculine nominative
• den lauten Lärm = masculine accusative
• das laute Radio = neuter

Because Musik is simply a noun with grammatical gender die in German:

• die Musik

Grammatical gender does not always match any logical real-world category. It just has to be learned with the noun.

That is why the article and adjective agree with it:

• die laute Musik

Because im means in dem, and here it describes a location, not movement.

German in is a two-way preposition:

• dative for location: where?
• accusative for movement toward/into somewhere: where to?

Here the music is in the living room, so it is a location:

• im Wohnzimmer = in dem Wohnzimmer

If someone were moving something into the living room, you would use accusative:

• Ich gehe ins Wohnzimmer. = I go into the living room.

So:

• im Wohnzimmer = in the living room
• ins Wohnzimmer = into the living room

im is a contraction of:

• in dem

German often contracts a preposition + article:

• im = in dem
• am = an dem
• zum = zu dem
• zur = zu der

So im Wohnzimmer literally comes from in dem Wohnzimmer.

The sentence follows normal German main-clause word order:

• Ich = subject
• wundere = finite verb in second position
• mich = reflexive pronoun
• über die laute Musik = prepositional phrase
• im Wohnzimmer = another prepositional phrase

So the structure is roughly:

Subject + verb + reflexive pronoun + other information

German keeps the finite verb in second position in a normal statement.

You could also move some parts for emphasis, for example:

• Über die laute Musik im Wohnzimmer wundere ich mich.

That is more marked, but grammatical.

In this sentence, the most natural interpretation is that the music is in the living room:

• the loud music in the living room

So im Wohnzimmer most naturally attaches to Musik.

However, depending on context, German can sometimes leave small ambiguities like this, just as English can. If you wanted to make the location of your wondering clearer, you might rephrase:

• Ich wundere mich im Wohnzimmer über die laute Musik.

That sounds more like I am in the living room, and I am surprised about the loud music.

Yes. That is grammatical, and it means something very similar.

Compare:

• Ich wundere mich über die laute Musik im Wohnzimmer.
• Ich bin über die laute Musik im Wohnzimmer verwundert.

The version with sich wundern is very common and natural in everyday German.
The version with verwundert can sound a bit more formal or descriptive.

Because in German, all nouns are capitalized.

So:

• Musik = noun → capitalized
• Wohnzimmer = noun → capitalized
• laute = adjective → not capitalized

This is one of the most noticeable spelling rules in German.