In 1935 Houseman began a fruitful but stormy creative partnership with the brash, enormously talented enfant terrible Orson Welles, then barely 20 years old. The Depression that had killed his business led to extremely good artistic opportunities, enabling the pair, under the auspices of the WPA, to form the Negro Theater Project and make history that year presenting a version of "Macbeth", set in Haiti, with voodoo priestesses playing the roles of Shakespeare's witches. They next established (also through WPA) the Classical Theater where Houseman produced (and Welles directed) the smash hits "Doctor Faustus", "Horse Eats Hat" and Marc Blitzstein's controversial proletarian musical "The Cradle Will Rock". Their most successful collaboration, however, was the Mercury Theater, founded in 1937, which gave rise to a memorable modern dress production of "Julius Caesar" (1937, with Welles as Brutus), the famous country-panicking Halloween radio broadcast of "War of the Worlds" (1938) and the landmark film "Citizen Kane" (1941).

Houseman, who readily acknowledged his pleasure serving Welles' genius, fell out with his partner over the authorship of "Kane". He had worked closely with screenwriter Herman Mankiewicz structuring the tale and as a general advisor during pre-production without receiving any screen credit, and his claims to that effect infuriated Welles, driving a lifelong wedge between the two. He worked briefly as a vice president for David O Selznick productions until World War II broke out and did uncredited writing on the screenplay for Alfred Hitchcock's "Saboteur" (1942) before receiving his first screenplay credit for "Jane Eyre" (1944, ironically starring Welles as Rochester). Houseman then embarked on a career as a film producer, collaborating with directors like Nicholas Ray ("They Live By Night" 1948, "On Dangerous Ground" 1951), Vincente Minnelli ("The Bad and the Beautiful" 1952, "The Cobweb" 1955, "Lust For Life" 1956, Two Weeks in Another Town" 1962), and John Frankenheimer ("All Fall Down" 1962). He earned his only producing Oscar nomination (Best Picture) for Joseph L Mankiewicz's version of "Julius Caesar" (1953).

In addition to his film work, Houseman kept his hand in the theater, directing Broadway productions of "Lute Song" (1946, with Mary Martin) and "King Lear" (1950, with Louis Calhern), not to mention "Coriolanus" (1954, with Robert Ryan) at NYC's Phoenix Theater. In 1956, against the counsel of friends and family, he assumed the low-salaried position of artistic director for the new American Shakespeare Festival in Stratford, Connecticut and subsequently served as artistic director of the Professional Theater Group at UCLA (1959-64, which evolved into the Mark Taper Forum company) and the City Center Acting Company (1972-75), as well as producing director for the APA Repertory (1967-68). Having established the Drama Division of the prestigious Juilliard School (remaining as director until 1976), he also co-founded in 1972 The Acting Company, a touring repertory troupe whose initial members included Kevin Kline, David Ogden Stiers and Patti LuPone. Houseman stayed on as artistic director until 1986, the same year the John Houseman Theatre on NYC's 'Theater Row' was dedicated in his honor. In all, he helped establish nine theater companies during his lifetime.

The final chapter of Houseman's illustrious career happened not by design, but by accident. He was contemplating retirement when James Bridges, one of his former assistants at UCLA's Professional Theater Group, asked him to take the part of the formidable, slightly sadistic Professor Kingsfield of "The Paper Chase" (1973). The role, which he would later reprise for the CBS and Showtime series, earned him a Best Supporting Actor Oscar and opened the door for the onslaught of parts that would occupy the last 15 years of his life. Though best remembered as the crusty Kingsfield and as spokesman for the investment concern Smith, Barney ("They make money the old-fashioned way. They earn it."), he acted in feature films like "Three Days of the Condor" (1975), "Ghost Story" (1981) and "Another Woman" (1988). On TV, Houseman played Winston Churchill in the "Hallmark Hall of Fame" presentation of "Truman at Potsdam" (NBC, 1976) and lent his grand appearance to an impressive array of miniseries, including "Captains and the Kings" (NBC, 1976), "The Last Convertible" (NBC, 1979) and "The Winds of War" (1983). The last year of his life saw him in four feature films and two miniseries, and despite his failing health, he worked on various projects up until three days before his death on the 50th anniversary of "The War of the Worlds" broadcast.