The tavern can be used to recruit new units and buy upgrades. Clicking on the building on the map brings up a window with all the options.
The more expensive houses are just more expensive (as far a I remember). The blacksmith does nothing, it was meant to provide armour items like boots, shield, helmet, platemail etc that would provide extra bonuses but we didn't have time to implement it and we ran out of time even to remove it before the deadline.