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Redhedded was exactly right in her assessment. Silence is always taken as agreement.
As both the daughter and the mother of "foreigners" I wouldn't have ever let the remark pass. But since you did and since you want to continue being friends, I think you have to say something.
I'm with Red in the fact that since this is an optional relationship (not one caused by family) I would stop being friends because I think such prejudice is indicative of larger problems. There are relationships where one must ignore such remarks (inlaws, stepparents) but a neighbor, no matter how outwardly "nice" isn't one of them.
Sorry you discovered something so ugly next door.
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