Here's a graphic example of condensation happening in a wall:
The diagram above shows a typical wood frame construction section view with fairly basic layers:
Note that around layer #4, 5 and 6, our assembly is experiencing moisture as the dew point is on the cold backside of the sheathing. This is happening because the temperature at that point allows moisture vapour to change into condensation. The moisture can be carried by air leakage and vapour diffusion through the assembly.
The water droplets in the diagram represent condensation. The point in temperature where moisture laden air (vapour) changes to condensation (water) is called the Dew Point.