I am not clear on your post, but have you checked for roof leaks? Do you know where your pipes run?

I hope I am understanding you correctly.

Where do you live? If you live up north there should be some sort of insulation in there too. If you live in a place like Florida, then there might not be insulation. I was kind of surprised when my bath surround was removed to be able to see the siding beyond the studs. There is even a little door in the siding which I believe provides access to the bathroom plumbing from the exterior.

I imagine you can get water between the walls during a driving rainstorm if the rain is heavy and going sideways (like a hurricane).

Plywood? Why it is it plywood and not sheetrock, or wall board?...or lathe and plaster? Strange. Whatever you do, you need a waterproof membrane between it and the surface that gets wet. Questions and questions.

-Babka

Do you have insulation (as asked prior)? Which side of the studs is the plywood on (exterior sheathing maybe)?

I did one last year. Cut out the rot. Put in supports in the floor from downstairs...access in the washer/dryer closet....no creaking and more support for the bath floor. Then put in new green board in the walls...hardy backer on the floor, tiled the floor...looks new and feels solid.

Thanks everyone for suggestions. Additional information

1. Insulation was wet and therefore has to be replaced.
2. Wall board is rotten, tyvek still present intact between wallboard and sidings.
3. Water leak identified as through the interior (tile grout)

Now have following task that needs to be completed:

1. Remove sidings
2. remove Wallboard/tyvek.
3. Install couple of 2x4 alongside very partially deroded studs.
4. Replace insulation
5. Install Cement board
6. Install tiles

Can I just undertake steps 3, 5 and 6 now and rest in Spring, as sidings may crack or break if i meddle with them in 30 deg temperature

or

do i have to necessary take care of exterior first (step 1 to 4) before i take up step 5 and 6.

please do let us know your recommendations.

Thanks
ADR

adr1234:

You can't just replace stuff. You have to diagnose why it failed to begin with, abate that problem, then complete the repairs. This could be very serious.

we have identified the problem as grout leakage.