1. Razing houses angers the entire clan, regardless of whether they live there or not, politicizing large segments of the population, encouraging more young loonies to strap explosives to their chests to avenge the "wrongs" done to their people. Its a real Hatfield/McCoy situation.
2. It makes the Euros mad, without accomplishing much of anything. Believe it or not, international opinion is important, and Israel already has more than enough enemies as it is. An Israeli charm-offensive could be helpful in turning Yassir Arafat into the Pariah that he deserves to be.