A long history of social science research has established the homophily principle — contact between similar people occurs at a higher rate than between dissimilar people — yet the extent to which people draw on this principle when forming first impressions remains unclear. We argue and present evidence that people have a lay theory of homophily that they invoke when forming impressions of others. Perceivers anchor the impressions they form of a target on their knowledge of the people with whom the target associates. Rather than showing that the “people who know each other are similar” rule is used indiscriminately, study results indicate that its application is contingent on both the trait in consideration and the nature of the relationship between the target and his/her associates. The implications of these findings for social perception are discussed.