Unreal Engine is unable to locate Xcode.app unless it is in the Applications folder.
Searching for this path is not the “right” way to do it. There could be different Xcode versions installed, and the correct way to locate the one the user wants is with the following command:
$ xcode-select --print-path
which will return /Applications/Xcode.app/Contents/Developer or maybe /Applications/Xcode-iOS8/Xcode.app/Contents/Developer or whatnot. Since Xcode only supports having specific sets of toolchains installed, people might have different versions on their computer that they switch between.