What did God create in Genesis 1:1?

In the beginning God created the heavens(or heaven) and the earth. 

Here is what Bruce Waltke says about Genesis 1v1 (as quoted in Jordan's book): 

'First, 'heaven and earth' is a hendiadys (a single expression of two apparently separate parts) denoting 'the cosmos,' the complete, orderly, harmonious universe. For example, the hendiadys 'kith and kin' indicates all of one's relatives. More specifically, the hendiadys is a merism, a statement of opposites to indicate totality, like the compounds, 'day and night,' 'summer and winter'. 

Now the elements of a compound must be studied as a unit, not in isolation. The hendiadys, 'heaven and earth,' cannot be understood by treating 'heaven' and 'earth' as separate elements any more than 'butterfly' can be decoded by investigating 'butter' and 'fly' in isolation.' 

And here is Jordan's response:

Well, in isolation from everything else in the Bible, and in isolation from the rest of Genesis 1, this might make sense. It is true that heaven and earth are two sides of one cosmic coin, and so the phrase might just mean 'cosmos'. How do we know, however, when to take a phrase like this as a hendiadys and when to take it as two distinguished things? We can only know from context, not from the words themselves. 

...in Genesis 1 we find that God called the firmament 'heaven' (v8) and this firmament-heaven is the place where the sun, moon, and stars are located (v14-19). Is this the same as the 'heaven' of Genesis 1:1? No, because there is water above this firmament heaven (v6-7). Where is that water located? Well, later in the Bible we see a sea of ice around the heavenly throne of God (Ezek.1:22; Rev.4:6). Thus, the narrative text of Genesis 1 clearly assumes that there is a created throne-heaven as well as an 'earth' that, in the largest sense, is a lower cosmos including the stars.   [bold verses are my addition]

Creation in Six Days: A Defense of the Traditional Reading of Genesis One, p38

Now, if you are like me this hurts your head! 

So let's listen again. Here is Jordan in another place:

This heaven (Genesis 1v1) is the 'highest' or 'third' heaven. In Genesis 1:8, God created the 'firmament' within the earth, and called it 'heaven.' The stars were placed in this 'firmament heaven,' and birds are said to fly in it (Genesis 1:17, 20). Thus neither the atmospheric heaven or 'outer space' were established until later in the week, and are actually part of the original 'earth' of Genesis 1:1. 

The heaven created in Genesis 1:1, then, is the special throne-house of God. 'Thus says the LORD, 'Heaven is My throne, and the earth is My footstool''(Isaiah 66:1; cf. Psalm 11:4; Matthew 5:34; 23:22; Acts 7:49). It exists (to use the language of science fiction) in another dimension from earth, infinitely near to us, yet also infinitely far away. 

The Bible shows us quite a lot about heaven. In fact, if we do not understand heaven, we cannot do our work here on earth; for we pray 'Thy will be done on earth as it is in heaven.' If we do not know what heaven is like, we cannot imitate it on earth. Thus the Bible frequently opens heaven to give man a view of what it is like. Ezekiel's visions of the divine Glory (Ezekiel 1:1ff.; 3:12ff.; 10:1ff.; 11:22ff.; 43:2ff.) are a good place to start. As we shall see, the 'glory-cloud' of God is a picture of heaven; when it appears, we get a view of heaven.  

Through New Eyes: Developing a Biblical View of the World, p41-42