Clouds form when air is cooled to its dewpoint
or the temperature, if the air is cooled, it reaches saturation. Air
can reach saturation in a number of ways. The most common way is
through lifting.
As a bubble or parcel of air rises it moves into an area of lower pressure (pressure decreases with height). As this occurs the parcel expands. This requires energy, or work, which takes heat away from the parcel. So as air rises it cools. This is called an adiabatic process.
The rate at which the parcel cools with increasing elevation is called
the "lapse rate". The lapse rate of unsaturated air (air with relative
humidity <100%) is 5.4°F per 1000 feet (9.8°C per kilometer). This is called the dry lapse rate. This means for each 1000 feet increase in elevation, the air temperature will decrease 5.4°F.
Since cold air can hold less water vapor than warm air, some of the vapor will condense onto tiny clay and salt particles called condensation nuclei. The reverse is also true. As a parcel of air sinks it encounters increasing pressure so it is squeezed inward.
This adds heat to the parcel so it warms as it sinks. Warm air can hold more water vapor than cold air, so clouds tend to evaporate as air sinks.