Terms of the deal weren't disclosed.
Palmer and Houshmandzadeh were Cincinnati Bengals teammates for six seasons, and both had their greatest NFL success when they were together.
Houshmandzadeh, 34, had been out of the NFL since playing with the Baltimore Ravens last season, but he had been working out in Southern California with Palmer before the Raiders (4-3) acquired the quarterback in a trade from the Bengals last month.
Houshmandzadeh also is very familiar with Raiders coach Hue Jackson, who was the receivers coach in Cincinnati for three years.
Houshmandzadeh averaged 89 catches over a five-year span in Cincinnati. His best season came in 2007, when he caught a career-high 112 passes for 1,143 yards and 12 touchdowns, making his only Pro Bowl.
But Houshmandzadeh struggled after leaving the Bengals. He had 79 catches for 911 yards and three touchdowns with the Seattle Seahawks in 2009 before bottoming out last season with the Ravens when he had just 30 catches. His tenure in Baltimore ended with a key fourth-down drop during a playoff loss to the Pittsburgh Steelers.
"He's a guy that made a lot of catches when it was sticky," Jackson said Monday before Houshmandzadeh signed. "With people draped all over him, he made some uncommon plays for us in Cincinnati. That's all I can go by in Cincinnati. I did not coach him in Seattle, I did not coach him in Baltimore. That's why I have to take a great look at the player. It's been a while."
Jackson apparently liked what he saw because the Raiders signed him. Houshmandzadeh gives Oakland a veteran receiver on a unit that's mostly young and unproven.
Third-year pro Darrius Heyward-Bey leads the team with 27 catches for 434 yards, but no other wide receiver has more than 15 catches so far this season. Speedster Jacoby Ford has been slowed by various injuries, rookie Denarius Moore had a fast start before leveling off.
Jackson told NFL Radio on Tuesday that he wanted to acquire Houshmandzadeh in training camp, but the timing wasn't right. And despite the fact that the receiver hasn't played this season, Jackson wouldn't rule out Houshmandzadeh making his debut Sunday against the Broncos.
"I think there are some positions where you have to be very careful when you put guys out there. I don't think the receiver position is one of those," Jackson said. "If a guy can run routes and catch and he's comfortable I think he's OK. I think a guy can go in there real quickly and play."
The Associated Press contributed to this report.