God values our holiness because it is only when we are holy that we can commune and have an intimate relationship with God in His presence. It took Jesus Himself becoming the atonement for our sin to become righteous and now we can enter freely into a relationship with Christ.
Because of our sins, we were separated from God because God is holy and just and cannot coexist with sin; holiness is most important to God. So if holiness and righteousness is so important, why does He hate legalism?
Legalism is being completely focused on rules and laws, and is often ruled by a need to perform and a fear of not being adequate. Though it sounds a whole lot like holiness, it is not. The big difference between the two is the root.
At the root of legalism is not a desire to commune with God in a relationship, but a desire to be made righteous by human efforts - to be like God. And as far as I remember, that was the first sin of man as Eve ate of the tree of knowledge of good and evil because the serpent told her that it would make her like God.
Contrary to legalism, at the root of a pursuit of holiness is an understanding that we cannot be justified on our own. Romans 3:23 tells us "for all have sinned and fallen short of the glory of God." That means if you think you can meet God's standard on your own, you're terribly wrong. And that's why God had to send Jesus to be our only way to meet the standard.
Romans 5:1 says, "Therefore, since we have been justified by faith, we have peace with God through our Lord Jesus Christ." Jesus Christ became the ultimate atonement for our sin. He fulfils for us what we could never fulfil on our own.
Legalism, on the other hand, denies completely the need of this grace. Many if not all legalistic people believe that they have now achieved a stature high enough to be personal guards to their own good conduct, but the truth is we will never be completely there. We might be getting there but no one has completely arrived.
That's why legalism is such an insult to God, because it smacks in the face of the fullness of His grace by denying this free gift that He has given to us not because we deserve it but because we need it. We need Jesus and without Jesus we will never be right with God and therefore will never be able to freely enter a relationship with Him.
The power of the grace made available through Christ was never meant to be mixed with our own personal efforts to be holy. God has always meant that we be justified and changed only through the power of His grace.
