Alveoli, the lung’s respiratory units, are tiny sacs where oxygen enters the bloodstream. They are lined by flat alveolar type 1 (AT1) cells, which mediate gas exchange, and AT2 cells, which secrete surfactant. Rare AT2s also function as alveolar stem cells. We show that AT2 lung stem cells display active Wnt signaling, and many of them are near single, Wnt-expressing fibroblasts. Blocking Wnt secretion depletes these stem cells. Daughter cells leaving the Wnt niche transdifferentiate into AT1s: Maintaining Wnt signaling prevents transdifferentiation, whereas abrogating Wnt signaling promotes it. Injury induces AT2 autocrine Wnts, recruiting “bulk” AT2s as progenitors. Thus, individual AT2 stem cells reside in single-cell fibroblast niches providing juxtacrine Wnts that maintain them, whereas injury induces autocrine Wnts that transiently expand the progenitor pool. This simple niche maintains the gas exchange surface and is coopted in cancer.