a packet sniffer could pick up the password on its way to the server. for most sites (non-financial/non-commercial) this isn't a concern as it would require that someone have full access to a network or to a computer on the route between the user and the server.
encypting all user data using SSL is a good idea, however is an overkill for many sites.
the main reason to store encypted passwords on the server is to protect the user in case the database is compromised.