The number of California homes landing in foreclosure reached a five-year low in the third quarter as home prices rose, home sales ticked up and more distressed borrowers obtained short sales.

DataQuick reported that 49,026 notices of default were recorded on homes in the state during the third quarter. That is down 10.2% from the 54,615 properties reported in the second quarter and a 31% drop from the 71,275 notices recorded a year earlier.

Short sales helped stave off foreclosures by allowing homeowners to escape without facing the distress that comes with a foreclosure. Short sales overall made up 26% of the state’s resale activity during the third quarter.

However, DataQuick says that may change when the New Year kicks-in since a temporary debt forgiveness feature to the tax code will expire without Congressional intervention. The feature encourages short sales for troubled borrowers, giving them a way out without having to pay a penalty on the debt forgiven.

Home prices also are rising giving homeowners more equity. The median price for a California home hit $300,000 last quarter, a 32% jump from the market’s bottom price of $227,000 in the first-quarter of 2009.