There is a huge difference between a 3 year old and a 5 year old. If he's just 3, it wouldn't really bother me, personally. Naked is a preferred state of being for a toddler.
A five year old, on the other hand, is well past the baby stage and should not be outside naked. The next time you are speaking to these particular neighbors, you could mention that you had guests over who saw him naked and it made them very uncomfortable. And come to think of it, you are not comfortable with it either. On top of THAT, the boy is aggravating the dog, which is bothering everybody. If they don't take the proper cues from that, they are hopeless.