I am stunned to read this, and I hope I do not offend you, but it's only partly by the creepy neighbor.
Yes, he is disgusting, just sick. I don't care what you do in your personal life, but to let impressional teenagers know about it is just wrong. There is no reason for kids to know about adults sexual pratices. I totally believe you should be open with kids about the birds and the bees, but they don't need those kinds of details. But I don't live in a cave, you hear stories about creeps every day, sad but true.
My biggest concern is your husband. Gosh, I think if this was my family, I'd be worried about my husband's reaction to this and not because he'd take it lightly. My DH is a mild tempered man until you mess with his family, then you'd better watch out. I can't get over your DH's reaction, that is what is really bothering me.
You totally need to contact the police. So often you hear of bad things happening and there were signs that went overlooked. This to me is a giant, glowing neon sign. Don't look back on this moment with regret. Keep your DD far away, and keep a good eye on her, I know it's hard to do when they get older, but you have to. I personally would rather assume he has bad intentions and be wrong, then assume it was nothing and be wrong.
I too feel bad for their daughter, by notifying the police hopefully they will insure her safety, right now you have to take care of your daughter.
Overreacting, not even close....