The Clippers had considered waiving Smith, league sources told Yahoo Sports. The trade allows the Clippers to save $2 million in luxury tax.
The Clippers, who signed Smith during free agency in July, also will send cash to Houston to cover the remaining $460,000 on Smith's $1.4 million minimum salary.
"I'm excited," Smith told Houston's Fox 26. "It's a place that I probably should have never left."
Houston received the draft rights to forward Maarty Leunen in the deal, while the Clippers received the draft rights to forward/center Sergei Lishouk.
Smith, 30, averaged 12 points and six rebounds in 55 games for the Rockets last season. He averaged 5.7 points and 14.3 minutes in 32 games with the Clippers this season.