The only answer I could find was something about Nephelae. Is there any record of what people(s) thought clouds were besides this and condensed water vapor?
The Ancient Greeks at least had a rudimentary understanding of the water cycle (Iliad XXI.196-7). The dates of the Iliad are rough, but certainly no later than 600 BC. Herak and Stringfield speculated that the knowledge was known in Ancient Greece no later than 1000 BC.
There are various references to the clouds around Olympus being a stable land for the gods to walk and live on, and presumably that thought carries over to clouds simply floating by. Certainly the idea of a spiritual heaven being cloudy persists even to today, and in the first centuries AD there are apocalyptic texts that discuss angels playing harps on clouds (Apocalypse of Peter, IIRC, in case you were wondering where that particular image came from). You can also see that Yahweh appears in the desert as a cloud, lending further divine connections to it.
I think, though, that the ancient world was of two minds about clouds. While a clearly divine element was attached to them, Aristophanes so eloquently asks, "Have you ever seen it rain when a cloud wasn't in the sky?" and then so eloquently answers, "Wow, you're right! And here I thought it was Zeus pissing through a sieve!" (The Clouds, 370-3).
One of my favorite works of ancient literature is the Meghadūta (Cloud Messenger), a poem written by the Sanskrit poet Kālidāsa, who wrote around the 5th century CE in north-central India. In the poem, a yaksha (a sort of humanoid supernatural creature in Indian mythology) asks a cloud to ferry a message to his lover, who lives far away from him.
It's above all a work of imaginative fiction, but there are several lines that suggest to me that Indians knew how the water cycle worked.
The following excerpts are from this translation: http://www.sacred-texts.com/hin/sha/sha17.htm.
The repeated references to the cloud "drinking" from streams and changing hues or becoming heavier or fuller suggest to me that the water cycle was known at that time.
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Learn first, O cloud, the road that thou must go,
Then hear my message ere thou speed away;
Before thee mountains rise and rivers flow:
When thou art weary, on the mountains stay,
And when exhausted, drink the rivers' driven spray.
(Stanza 13)
.
Where thick rose-apples make the current slow,
Refresh thyself from thine exhausted state
With ichor-pungent drops that fragrant flow;
Thou shalt not then to every wind vibrate
Empty means ever light, and full means added weight.
(Stanza 20)
.
...
If thou subdue thy thunders to a tone
Of murmurous gentleness, and taste the sweet,
Love-rippling features of the river at thy feet.
(Stanza 24)
.
Where women steal to rendezvous by night
Through darkness that a needle might divide,
Show them the road with lightning-flashes bright
As golden streaks upon the touchstone's side--
But rain and thunder not, lest they be terrified.
(Stanza 37)
.
Narrow the river seems from heaven's blue;
And gods above, who see her dainty line
Matched, when thou drinkest, with thy darker hue,
Will think they see a pearly necklace twine
Round Earth, with one great sapphire in its midst ashine.
(Stanza 46)
.
Sweet friend, drink where those holy waters shine
Which the plough-bearing hero--loath to fight
His kinsmen--rather drank than sweetest wine
With a loving bride's reflected eyes alight;
Then, though thy form be black, thine inner soul is bright.
(Stanza 49)
. ... And a bunch more. (Read the poem - it's pretty!)
In the Norse creation myth, clouds are the thoughts and brain of the first being, a jotunn named Ymir, who was killed by Odin and his less famous brothers Vili and Ve. Of course this did not answer how literal contemporary people took this story.