Dermal fibroblasts are required for structural integrity of the skin and for hair follicle development. Uniform Wnt signaling activity is present in dermal fibroblast precursors preceding hair follicle initiation, but the functional requirement of dermal Wnt signaling at early stages of skin differentiation and patterning remains largely uncharacterized. We show in mice that epidermal Wnt ligands are required for uniform dermal Wnt signaling/β-catenin activity and regulate fibroblast cell proliferation and initiation of hair follicle placodes. In the absence of dermal Wnt signaling/β-catenin activity, patterned upregulation of epidermal β-catenin activity and Edar expression are absent. Conversely, forced activation of β-catenin signaling leads to the formation of thickened dermis, enlarged epidermal placodes and dermal condensates that result in prematurely differentiated enlarged hair follicles. These data reveal functional roles for dermal Wnt signaling/β-catenin in fibroblast proliferation and in the epidermal hair follicle initiation program.