Houston made over 200 appearances for the club and returns to the Falkirk Stadium 18 years after his last stint with them as a coach.
The 55-year-old, who was with Celtic in a scouting capacity last season, is targeting promotion to the Scottish Premiership despite the tough competition he faces from Hearts, Hibs and Rangers next season.
Houston, who left Dundee United by mutual consent in January 2013 after beingin charge since 2009, told Sky Sports News: "The budgets of the other three clubs, which are much, much higher than what we have here, mean they should finish one, two, three but that's not the way football is.
"Football isn't played on paper but I've been to Ibrox, I've been to Easter Road and I've been to Tynecastle with teams and have won there.
"What I will be emphasising is not so much going there, because the motivation levels will be up, they will be ready for it, they will learn from it whatever result we get.
"I will be more interested to make sure their motivational levels are the same if we are playing so-called lesser teams. You have got to go to the Cowdenbeaths, the Raith Rovers, Livingstons etc. I don't mean to be disrespectful to them but we have to make sure our motivational levels are high."