While no one can say for sure, unless Jony Ive joins Ask Different, I think there has been enough talked about in keynotes and other various appearances (D8, for example) that it can be reasons.
(The Other) Jason's comment above hits the nail on the head. You feel the dip of the home button, and you know what it is. This also allows you to know which way is up. Because with an iPhone you'll feel a speaker grill, and on an iPod you won't feel anything.
The Power button isn't the only hardware button, because the home button is used for things like putting the device into DFU mode. This is done even after the device leaves the OS, so it has hardware-level functionality too. I'm fairly certain that the home button is a hardware-level button, I'm pretty sure I've turned my phone on via it before. Not to mention using it to reset the device in the few situations where I've locked the device up. The home button is not software level button, the volume buttons and ringer switch are the only ones.
Why would you want the home button on the sides of the device? Or top? That makes it completely impossible to meaningfully put to use, especially as frequently as we do.
Hold your iPhone normally, and then start to look at where your hand lies. My palm covers (the bottom) half of the right side, with my thumb at the top. There is a small gap, which happens to be where the SIM card slot is.
The top of phone: Headphone/headset port, noise-canceling auxiliary microphone, a small gap which would be a pain to push as frequently as we hit the home button, and the sleep button.
On the left of the device, all of my fingers cover most of the available room leading up to the volume buttons and ringer switch. And you also have to be considerate of those who are left-handed.
So what's left? A far corner of the device, or the back. The back would be an incredibly silly location, and having a small button in any corner would be massively inconvenient for someone.
The Home button is in a principle spot. It is dead center, large enough to wildly jab at and hit with very good accuracy, and ever present (well, duh). Good for either handedness, and even when it's docked. A quick push in the middle of the device resets your context, taking you to the home screen to move onto your next task.
There is no place on this phone that could better serve the home button's purpose. Period.