"Horses have lived here since the sixteenth century."
Translation:Koně tady žijou od šestnáctého století.
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"Koně tady žijí od šestnáctého stolet" is also accepted. Perhaps there was something else in your answer that Duo didn’t like. For troubleshooting, it’s best to either (1) use the report button in addition to commenting, or (2) include a screenshot in your comment, so that the team can see your complete answer. (Reporting is easier.)
How do you define wrong and awkward? It sounds unnatural and I do not think a native would normally say that. Tady does prefer the second position here, it is mentioned in this discussion https://forum.duolingo.com/comment/31466920/Ordering-the-Czech-clitics-Introduction-2019-04-18
Both of you are right to some extent. "Bydlet" is really "to dwell", to have your home somewhere.
It also isn't used about animals too often. It is not impossible when they have their home in some specific hole or tree or somewhere, but then it certainly is about that particular small place where they go to sleep and have their eggs or their small offspring and still is not too common. Also, they should normally dwell their on their own, not be put their by their owners.
The verb "bydlet" cannot really be used about some species being present in some area.