His first home building project nearly sank--literally.

As Fred Napolitano tells it now, 30 years later, he had borrowed $10,000 from his father-in-law to build 18 houses in Flushing, N.Y. Things went fine on the first six, but there was a problem on No. 7.

" 'We can't find bottom,' " he recalls his workers telling him after they had dug and dug looking for firm foundation. They kept searching until the problem finally became clear: "There was a small lake underneath that no one knew about," Napolitano said.

"I thought, 'On my first job I'm going to go bankrupt.' "

But they put in pilings to hold up the foundation and went on to build all 18 houses. It took two years to build and sell them, but he finally broke even "and even made a couple of bucks." More importantly, he didn't go bankrupt.

Napolitano is once again looking for the bottom--the bottom of a depression that threatens to sink an entire industry.

The Virginia Beach homebuilder has taken over the presidency of the 122,000-member National Association of Home Builders at a time when the industry is in worse shape than it has been since the Great Depression.

"Many builders are telling me that as soon as they get rid of their inventory they will get out of the business," Napolitano said at a recent dinner with a group of journalists, slowly lacing and unlacing his hands as he spoke.

Dark-haired and round-faced, he carries with him an easy manner and a quick smile, and he looks you in the eye when he talks. Despite 26 years in Virginia Beach, the husky voice still retains traces of a Brooklyn accent.

In other downturns, Napolitano says, builders have gone under, but these generally were the inefficient or incompetent--the ones that didn't belong in the business to begin with. It was a healthy weeding-out process. But it's different this time, he says, it's hitting the veterans now, some of the best in the business.

Napolitano knows this from personal experience. A partner of his in some joint ventures, a 55-year-old man with 25 years of homebuilding experience, recently went bankrupt. Now, Napolitano deals with a trustee on those projects.

One main reason Napolitano has survived during this downturn is that he diversified years ago into shopping centers and commercial ventures, though he still considers himself primarily a homebuilder.

A half hour into the dinner conversation, it's as though you've broken pasta with the entire family.

You know where his mother lives (New York), what his daughter does for a living and where she lives (a teacher who bought a mingles apartment in Virginia Beach close to the ocean), that two of his sons are in the business with him (a third is in college) and that his wife Jacqueline is an only child (so is he).

Napolitano remembers the date of his first project because it was the same year his daughter Theresa was born and a year after he was married. His first business was the Terry Corp., named after his baby daughter, and he still uses that company for land development projects. He later established Napolitano Enterprises for homebuilding and Pembroke Enterprises for insurance and commercial ventures.

His sons are in the business now, though he insists, "I didn't encourage them to do it." The eldest son is a partner, while the middle one came into the business last April. The youngest will be graduated in December and plans to join the firm.

Napolitano's father was a bricklayer, and bricklaying is how the new NAHB president started his homebuilding career, as well.

The career was one he stumbled into, however, primarily because of poor eyesight.

At the age of 17 1/2, his goal was to go to West Point, and he succeeded in getting an appointment to the military academy. In those days, a cadet had to have 20/20 vision without glasses, however, and he failed that test.

The lower middle-income Napolitano family couldn't afford to send him to college--and his mother wouldn't sign the papers for him to join the Army.

So, his father helped him get a bricklayer's license. His first boss took him on with one condition--that he go to school at night. As long as he was working in the trade, he figured he might as well study it, so that's what he did for six years.

In the meantime, he had gotten a job he liked, as assistant supervisor at an apartment building in Queens, and it was there he finally decided to stay in the business.

Three years after his first ill-starred building project in Flushing, he was approached with an offer to buy a parcel of lots near Virginia Beach. After a brief visit, he bought the lots and began a 10-month stretch of living out of a motel during the week and commuting to New York to see his family on weekends. In 1956 he and his wife decided to make a permanent move to Virginia Beach, where they have been ever since.

Some who have watched his first months in office at NAHB say that Napolitano had not previously been as involved in party politics as was his predecessor, Herman Smith of Fort Worth, and that the new association president is more businessman than politician.

Still, he appears more ready to guide the association's membership toward policy decisions than Smith, who maintained more of a parliamentarian approach to the office, these observers say.

Last month Napolitano jumped into the political fray by announcing a "hard-ball" approach to campaign contributions by the association's political action commmittee, BUILD-PAC. Only those senators and congressmen that are actively supporting the group's housing ideas will get part of some $1 million expected to be raised by BUILD-PAC, he said.

"He [Napolitano] is stronger than any of us expected him to be," said one participant in some of the early board meetings. This observer also credits Napolitano with leading the association to its about-face policy at its January convention, where the group called for deep subsidies from the federal government. A year earlier, the NAHB endorsed President Reagan's overall economic program with no call for special assistance for the housing industry.

Napolitano denies that he was the primary force behind the association's change of heart on federal policy, saying instead it was merely a matter of a year's worth of tough personal experiences by members.

"Reagan was elected for a change in direction in the country," but now members have gone too long without relief, Napolitano said in an interview. "They want to give the president a chance, but they can't wait any longer."

Napolitano senses new sympathy for the housing industry's plight, both on Capitol Hill and in the administration.

He particularly sees a favorable transition on the part of Housing Secretary Samuel Pierce since the homebuilders' January convention in Las Vegas to which Pierce brought little hope of federal assistance for the beleaguered industry.

Pierce "has turned into a housing advocate," Napolitano, adding that he now believes the secretary will push for a shallow subsidy for the industry.

The NAHB president also is heartened by Reagan's creation of a Cabinet-level housing task force, chaired by Pierce, with a mandate to come up with something to help the industry by the end of this month.

On the Hill, members of both parties are starting to see housing as a political issue in this year's mid-term congressional elections, Napolitano said, adding that he is getting more confident that the industry will get some substantial assistance from Congress.

Napolitano figures he will be away from his private business about 90 percent of the time this year, leaving it to his son to run. He will devote his time to traveling around the country and talking to Washington officials in promoting his primary goal, "to get housing moving again, to make it a national priority to preserve the American dream."

When does he expect a recovery? Napolitano shakes his head:

"If I knew that, I'd call my son and tell him to start 25 more houses."