You've played it wrong. After a building was bought, the next card is drawn and put into the open slot.
Thanks, with that I found the rule as the last paragraph under the rules for building houses.
I don't think it changed our 3 player games dramatically that we only replaced the houses at the end of the round. There is nearly always a lot of possible actions, but only so many villagers and gold to spend. Still, it will be interesting to see how this affects our next game.