When water gets behind paint, it will also evaporate, and if there is no where for it to go will push out a bubble of paint, eventually causing a blister and a failure of the paint. Pretty simple idea, but with a more involved solution.
First, figure out where the water is coming from. Water from the outside will come through existing damaged paint or wood, a leaky roof, holes around utilities that penetrate the walls, poorly flashed or caulked windows, or wind driven rain. The water saturates the wood, and can travel to other areas under the power of gravity or capillary action.
Water from inside the home comes from higher humidity levels – poor ventilation, an unvented dryer, leaky pipes, aquariums, etc. The water evaporates, then makes its way into the wall through interior wall penetrations, or through a porous wall covering.
To solve paint blisters caused by exterior or interior water, stop the water intrusion. Ventilate the house with a fan on low speed 24 hours a day, seal the exterior penetrations, fix the leaky roof or plumbing, replace the broken siding, take shorter showers. Then, remove the affected areas by sanding all the way back down to the bare wood. Note: eating or breathing lead paint is bad for your kids, your pets, and you. Make sure all of the dust and paint chips wind up in the trash, not in your family, by using lead safe work practices.
After sanding back down to bare wood, seal the wood with a paintable water repellent preservative and let it dry for three warm days. As soon as it is cured, apply a good quality primer. As soon as that has dried, (usually about 48 hours) apply two coats of high quality latex house paint. Check the manufacturers directions, but most latex housepaints need just a couple of hours between coats.
Follow this up with routine maintenance: At least once a year, look around the inside and outside of the house specifically for places where water might be entering the walls. Is that fan still running? Did a winter storm rip off some shingles? Is all the siding still intact? Fix these items before they cause a bigger problem.
For more information about research of wood supported by your tax dollars, check out the Forest Products Laboratory, part of the Forest Service. Here is a great article that features their work in blistered, flaking, and peeling paint: http://www.fpl.fs.fed.us/documnts/pdf1997/willi97a.pdf