EXCLUSIVE By Russell Stoddart
Gerrard will play his final game at Anfield against Crystal Palace on Saturday before ending his 17-year association with the Merseysiders at the end of the season.
Player and club were unable to agree terms on a new contract with Liverpool only willing to offer the 34-year-old reduced terms to extend a deal which runs out this summer.
And Houghton, who played 202 times for the Reds in a five-year spell, believes Liverpool should have taken a leaf out of rivals Manchester United's book and done all they could to convince Gerrard to stay.
"Manchester United got it right with Ryan Giggs," Houghton told Goal. "A great one-club man who was recognised as having so much still to offer.
"Louis van Gaal came in and saw that he was a point of reference at United, and that should have been the thinking with Stevie.
"I know Stevie wasn't ready for a coaching role, but even with an eye to the future I don't think it was ever offered to him.
"Stevie is unique at the club not just in his knowledge of the game but his knowledge of Liverpool.
"There are very few left at the club steeped with the traditions of Liverpool. Jamie Carragher left to join the media and he is another one that Liverpool would have done well to keep hold.
"Liverpool has always been a club with plenty of links with the past. Where are they now? First-team coach Mike Marsh is one, but not many more.
"Don't forget Stevie is a lad who was a Liverpool fan before he was a Liverpool player. If he wasn't a footballer, he'd probably be in the Kop. That is a priceless commodity that's been lost."
Liverpool are set to miss out on Champions League qualification this summer, finding themselves six points behind fourth-placed Manchester United with two games remaining.
Houghton believes his former club need more quality if they are to challenge at the highest level again and claims that the loss of Gerrard is a step in the wrong direction.
He added: "Liverpool have lost their superstars and they need to attract new ones if they want to get back in the Champions League and contesting league titles.
"Stevie is a superstar who could have attracted better players than Liverpool currently have by remaining at the club in an active capacity.
"He is an inspiration to many and his experience is invaluable. Now it's the MLS that is getting the benefit and it should still be Liverpool."
With the American campaign beginning in March and ending in December at the latest, there has been talk that Gerrard could return to the Premier League in MLS close-season.
Frank Lampard spent this term on loan at Manchester City despite announcing he had signed for New York City last summer, but Houghton does not envisage Gerrard playing another competitive match in England.
"I know Robbie Keane well and he combined playing for LA Galaxy in the MLS with playing here for Aston Villa a couple of years ago, but he said it took a toll on his body and has not done it since," he said.
"There is a lot of travelling involved and Stevie has gone over there to enjoy the end of his career, I don't think his heart would be in it playing for anyone else other than Liverpool."