To complete Puzzle #1: Residence Hut you need to obtain 4 water buckets and have master builders douse the huts that were set on fire by the volcanic eruption. Once the fires are out have the master builders repair the huts. Afterwards build a residence hut that is located southeast of where the Kraken was located.
Check out our Puzzle #2: Town Center Mural page to get the solution for the next puzzle.