פירוש על עבודה זרה 41:12

The halakhah follows R. Yose—it is permitted to sell them houses and fields. However, R. Joseph adds that one should not allow them to form a community, which means three residents. There are differences of opinion among commentators as to what this refers to. According to the Rambam, it refers to the permission to rent them houses in Eretz Yisrael. According to the Tosafot, it refers to outside the land, where one can sell anything to them. R. Joseph is concerned lest they form an enemy settlement, but this would only be within Jewish community.
I realize that today many of these laws sound “racist.” But we have to remember that the notion of inter-tribal harmony barely existed back then. These laws simply reflect the ethos of the time. Furthermore, while I think we do not like to admit it, there are cases where we would like the people who live in our immediate community to be similar to us. I hope that this similarity is not based on something superficial such as color of skin. But when it is a preference to live near other people of the same religion, I believe it is still understandable.