Home prices continue to rise and the increase is helping to lift more U.S. homeowners out of underwater territory on their mortgages, according to a new report by CoreLogic.

As of the third quarter of 2013, 6.4 million homeowners with a mortgage still owed more on their loan than the property was worth. That number is down 40 percent from 10.6 million a year earlier, the report shows.

"Almost 800,000 fewer homeowners are underwater compared with the previous quarter of 2013.  That is mostly due to the increase in home prices which were up almost two percent alone in the third quarter of 2013," said Molly Boesel, senior economist with CoreLogic.  "Nationally, the negative equity percent is 13 percent.  In New Jersey, the negative equity percent is also 13 percent, which is right in line with the national average."

What can be expected in the new year? Negative equity is expected to decline even further as the housing market continues to improve.

"If home prices were to increase from five percent today on a national level, another 1.2 million homeowners would regain equity," Boesel said. "Prices this year have been rising about 10 to 12 percent on a year-to-year basis and while we do expect prices to slow down in the next year, a 5 percent gain is highly likely. So, we could see another 1 million or more move into positive equity."

In the third quarter, Nevada had the highest percentage of mortgaged properties in negative equity at 32.2 percent, followed by Florida at 28.8 percent, Arizona at 22.5 percent, Ohio at 18 percent and Georgia at 17.8 percent. Meanwhile, the Orlando area had the highest percentage of mortgaged properties in negative equity at 32.3 percent.