I think Xabi is still better than Raul and Arbeloa, Madrid seems to be prioritizing Xabi. It is reported that De Zerbi, the Brighton coach, is also currently on Madrid target list, this could be the second option if Xabi fails to be brought in from Laverkusen.
Yeah that news has been rumoured from a while and it seems that Real Madrid is still studying the best option to pick and its availability. Of course training Real Madrid is an honour and winning with the team will make any coach a legend. I think that giving it a try will be a good challenge for any coach regardless of its outcome.
Xabi proved himself as a good coach. Leverkusen wasn't as serious as this season in the previous one. Same goes for Brighton, they have improved a lot lately, although being kicked out of EFL Cup was a negative result even though it isn't that important trophy.