The Houyhnhnms are puzzled by Gulliver. Because of his clothes, his ability to reason and his similarity to Yahoos, he is neither Houyhnhnm nor Yahoo. Because of his mixture of qualities, he is given a place to live that is between the lowly Yahoos and the high Houyhnhnms. Symbolically, Gulliver (man) is midway between the Houyhnhnms (innocence and perfection) and the Yahoos (depravity and chaos) and partakes of the qualities of both.
The Houyhnhnms are portrayed throughout this section as we might imagine Adam and Eve before the Fall. The Yahoos are portrayed as what man might become if there was nothing in him worth redeeming.
It is Gulliver's tragedy that he cannot accept his midway status. He does not understand that to strive to be like the Houyhnhnm is as unsatisfying as it is to plunge to the depths in which a Yahoo exists. It is as great a loss to lack passion, even if there is perfect calm, as it is to lack reason when there is nothing but chaos.