Rebounding home prices, a healthier balance of real estate supply and demand, and a slowing share of distressed homes for sale cut the number of U.S. home owners with an underwater mortgage by 700,000 in the first quarter of this year, according to real estate data provider CoreLogic, Santa Ana, Calif.

“This is a meaningful improvement that is driven by quickly improving outlooks in some of the hardest-hit markets,” said Mark Fleming, chief economist for CoreLogic. “While the overall stagnating economic recovery will likely slow housing market recovery in the second half of this year, reducing the number of underwater households is an important step toward reducing future mortgage default risk.”

CoreLogic says 11.4 million, or 23.7%, of all home owners with a mortgage were underwater at the end of the first quarter of 2012. That’s down from 12.1 million properties, or 25.2%, in the fourth quarter of 2011.

Another 1.9 million borrowers are only 5% underwater. If home prices continue increasing over the next year, these borrowers could move out of a negative equity position.

Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt, or a combination of both.

“We are encouraged by the positive trend of increasing housing prices and falling negative equity share in key states like Arizona, Nevada, and Tennessee,” said Anand Nallathambi, president and CEO of CoreLogic. “Although it will still be a slow recovery for U.S. home owners, we see this improvement as a stabilizing and positive development for the mortgage industry.”

Nevada had the highest negative equity percentage with 61% of all mortgaged properties underwater, followed by Florida (45%), Arizona (43%), Georgia (37%), and Michigan (35%). These top five states combined have an average negative equity share of 44.5%, while the remaining states have a combined average negative equity share of 15.9%.

The bulk of negative equity is concentrated in the low end of the market. For example, for low-to-mid value homes valued at less than $200,000, the negative equity share is 31% for borrowers, almost twice the 15.9% for borrowers with home values greater than $200,000.