Both male and female excavate the nest hole, a job that takes 1 to 3 weeks. Entrance holes are round and 1-1.5 inches across. Cavities are 6-12 inches deep and widen toward the bottom to make room for eggs and the incubating bird. The cavity is lined only with wood chips.
Cavity: Downy Woodpeckers nest in dead trees or in dead parts of live trees. They typically choose a small stub (averaging around 7 inches in diameter) that leans away from the vertical, and place the entrance hole on the underside. Nest trees are often deciduous and the wood is often infected with a fungus that softens the wood, making excavating easier.
When a woodpecker does use a birdhouse, he seems compelled to enlarge the birdhouse entrance before settling in. Sometimes this is done to make the hole entrance more comfortable; at other times it appears that the instinctual behavior to excavate needs to play itself out.
Some woodchips that result from excavation fall to the inside of a tree cavity or house and serve as a lining for the nest. Unlike other species, woodpeckers do not bring in any nesting material of their own. When putting out a house for woodpeckers, your adding 1-2 inches of woodchips to the floor of the house will help keep the eggs warm and snug.
Sources: duncraft.com; Cornell Lab of Ornithology