We address the mechanism by which adult intestinal stem cells (ISCs) become localized to the base of each villus during embryonic development. We find that, early in gut development, proliferating progenitors expressing ISC markers are evenly distributed throughout the epithelium, in both the chick and mouse. However, as the villi form, the putative stem cells become restricted to the base of the villi. This shift in the localization is driven by mechanically influenced reciprocal signaling between the epithelium and underlying mesenchyme. Buckling forces physically distort the shape of the morphogenic field, causing local maxima of epithelial signals, in particular Shh, at the tip of each villus. This induces a suite of high-threshold response genes in the underlying mesenchyme to form a signaling center called the "villus cluster." Villus cluster signals, notably Bmp4, feed back on the overlying epithelium to ultimately restrict the stem cells to the base of each villus.