<Difference>
<Type>update</Type>
<Path>/item/street</Path>
<NodeType>Element</NodeType>
<NodeName>street</NodeName>
<NewValue>2020 Washington Ave.</NewValue>
</Difference>

Now I want to build a new xml based on the XPath expressions in each
Path element just using XSLT.

I think you need an eval function to achieve what you want, which seems
to be dynamically evaluating XPath expressions supplied as strings.

You might want to take a look at Saxon's saxon:evaluate() extension
function.

--
Michael Ludwig