Amph, if possible, try to upgrade the ones you have before building new ones. Like DC mentioned, the happiness level is calculated by this formula:
G=(Nc/No)*10
Where G is the degree of happiness,
Nc is the sum of the levels scored by the houses,
and No is the number of houses.
So if a town has three level 1 houses, two level 3 houses and one level 9 house, it will be: (3x1+2x3+1x9)/6 =30% happiness
(in FAQ they have this example: (1+1+1+3+3+9)/6 =30% but I think mine is clearer :-)
From this formula, you can clearly see that you will get a much higher level of happiness with upgrading then building.
Letter on in the game it pays to add new dwellings, for new (and upgraded of course) houses, mean more workers and higher production.
My sponsor has achieved something completely incredible, after only 28 days in the game, (he never played Anno or anything alike) he already has a town with the highest population! To see this, please click on Financial news, Financial market tab (it is the one just below the affiliate hand) and then click on Town Shares and at the side of the search box, from the drop down menu, choose Population, you will see his name right at the very top, click on it and see his statistics :-)
Sure, his happiness is suffering cause of it, but eventually he will upgrade to the highest level all of his houses, and then he will be the very top player in the game. Because he has so many workers, he is already selling more raw products and more gold then members with higher happiness level. So you see, like I mentioned previously, there are various strategies for making the most income in this game, I hope you find yours...
Happiness is directly connected to the level of your houses. You upgrade your houses - you raise your happiness level.
In addition, you can't hire more workers if your population is 100% and without workers you can't do anything... so yep, houses are mighty important. Still at the very beginning, is better to upgrade some of your production buildings to a higher level before you upgrade your houses.
Different members have different strategies, but some of the basics from FAQ work for all.
Thanks
Btw may I have the link to the FAQ please?