I did this just yesterday. I used 3M Strip Caulk - look it up - it's essentially a compound you can use to seal around the light that provides a watertight seal. I read about it on these forums.

While the light was still unattached, I cut narrow strips of it and thumbed it on top of the crappy foam "seal" and up to the edge of the housing. Then re-attached the light (screwed it down), and any of the caulk that squeezed out I thumbed around the edge until it was smooth and uniform.

Took awhile, and the stuff is tacky to use, but it looks to be a great seal. The great thing about this stuff is that it doesn't have to be permanent (although it could be): if you need to remove the housing in the future it'll come off again with a little work - it doesn't dry.

 

it sounds like plumbers caulk

 

I used some stuff I got from autozone. It's like weather stripping and I cut it in half. Just put it where the old one was on top