before i go to explain what is wrong in this SC- i would like to divulge one concept on pronouns.
I feel this would help others too.
we all know about pronoun ambiguity error. But remember one thing:
-> if the pronoun is a subject , then it refers by default to the subject of the other clause.
->if the pronoun is a direct object, then it refers by default to the direct object of the other clause. (i.e., "pick the ball out of the draw and put it into this box)
Pronoun ambiguity error in essence means that if a pronoun is a subject but it needs to refer to the object of the other clause then we call the error as pronoun ambiguity. eg: pick the ball out of the box and throw it away. here the 'it' needs to refer to the box. But in this case- 'it' is an object pronoun and the object in the previous clause is 'ball'. so it looks as if the sentence is asking us to throw the ball out. this is where we say there is pronoun ambiguity.

Now lets come to our question.
Here 'they' is a subject pronoun and it refers to the subject of the previous clause- 'depressed property values'.So there is no pronoun ambiguity that occurs in this case.

a.they are potentially devastating for homeowners, whose [ No pronoun ambiguity. perfect!]

b.they can potentially devastate homeowners in that their ['They' refers to property values and 'their' refers to home owners. how can this occur? how can the possesive form of a pronoun refer to something else? Eliminated!]

c.for homeowners, they are potentially devastating,because their [ 'They' refers to property values and 'their' refers to home owners. this is not correct. Eliminated!]

d.for homeowners, it is potentially devastating in that their [what is 'it' here? 'it' does not have a proper antecedent. Eliminated!]

e.it can potentially devastate homeowners, whose ['it' does not have a proper antecedent]

Hope this helps!

And Swapna, please use the spoiler tab for the OA in your post. This is to ensure that users dont experience a bias the minute they read the question. It gives them enough scope to think independently without getting biased by the answer display.

Very nice explanation! Thank you jyothi.