Gulliver, accompanied by the grey steed, walks to the grey's house where Gulliver meets several other Houyhnhnms. The grey (the master of the house) then takes Gulliver into a "court" where he observes several Yahoos eating roots and the flesh of "dogs and asses." Gulliver is placed near one of the Yahoos for comparison by the grey and his servant (a sorrel nag). Gulliver, at the same time, inspects the Yahoo standing next to him more carefully, and he realizes very quickly that the Yahoo has "a perfect human figure." As for the Houyhnhnms' reaction, the grey and his servant note that, with the exception of Gulliver's body covering (and his shorter hair and fingernails), he and the Yahoos are identical. Later Gulliver learns that his diet will consist of oats (naturally) that can be roasted, ground into flour, and mixed with milk to produce a kind of paste (an oatmeal) that he can eat. The grey also provides Gulliver with some temporary living quarters in a building near the stable.
The contrast between the Houyhnhnms and the Yahoos is extreme. The horses are clean and sweet-smelling; their diet is temperate and vegetarian. Their habits constitute the temperance that the eighteenth century thought characterized reasonable man, stoics, and Adam before the fall. The Yahoos, on the other hand, are human in form and feature. They are filthy and they stink. They are omnivorous but seem to prefer meat and garbage. Significantly, they eat nearly everything prohibited by the biblical and Levitical food codes. Swift uses these details to make his comparison clear: the Yahoos' diet is depraved, whereas the horses' diet is like that of Man before the Fall.
Swift positions Gulliver midway — figuratively and literally — between the super-rational, innocent horses and the filthy, depraved Yahoos: Gulliver's home is midway between the stable house and the Yahoo pens. Gulliver lives an uneasy compromise with his nature. Physically, he is a Yahoo and only his clothes, thus far, prevent the horses from identifying him as a Yahoo. If the Houyhnhnms had recognized Gulliver as a Yahoo, Swift would have found it difficult to explain the way in which some of them accept Gulliver. Thus Gulliver's clothes are an excellent device for Swift. Because Gulliver's naked Yahoo-like self is hidden, Gulliver's identity is also hidden. Swift's point is that humans' basic difference from the Yahoo is largely artifice. Clothing — something artificial and extrinsic — "distinguishes" Gulliver.
Diet also places Gulliver midway between the Yahoos and the Houyhnhnms. He cannot live on oats alone. He must have some meat and some variety in his diet — the paste of grain and milk, for instance. Gulliver will try with admirable determination to improve himself; he will try to change himself into a more horse-like state, but he will fail. He is, simply, more of a Yahoo than a Houyhnhnm. His diet and his physique will prevent him from ever becoming a horse.
Swift uses Gulliver's character to establish a further point. Gulliver reacts to the Yahoos with immediate and overpowering detestation. He is horrified by the Yahoos' similarity to him. He lacks the humility to see himself as a sort of Yahoo. Rather, his pride leads him to try to become a horse. Yet Swift is saying that a person is not suited to become a "horse" (a dispassionate and virtuous stoic). Such dreams are as futile as Gulliver's belief that if he thinks hard enough he can acquire a fetlock or pastern.
wattled built with wattles, a sort of woven work made of sticks intertwined with twigs or branches.
rack a box of some type for holding grain or some other commodity.
necromancy the practice of claiming to foretell the future by communication with the dead; here, meaning that Gulliver believes that this experience must be the result of some kind of magic — that it can't really be happening to him.
nag a horse that is worn out, old, etc.
hams the hocks or hind legs of a four-legged animal.