I just happened to come by your question and i have a solution. But its in jquery. Its too simple.
$('iframe').contents().find('body').css({"min-height": "100", "overflow" : "hidden"});
setInterval( "$('iframe').height($('iframe').contents().find('body').height() + 20)", 1 );
There you go!
Cheers! :)
Edit: If you have a Rich Text Editor based on the iframe method and not the div method and want it to expand every new line then this code will do the needful.