How are "Owner-Produced Parts" handled under FAA regulations?
The July/August 2002 edition of FAAviation News (now FAA Safety Briefing) has a detailed article on owner-produced parts, including advice on best practices if you want to make your own parts. It does confirm that owners have very broad authority to do so, provided that they document everything properly.
Typical reasons for producing your own parts are (I've paraphrased them from the article here):

The aircraft has been out of production for years
The aircraft is an orphan without a Type Certificate
There is no technical support because the aircraft is so old
There may be long delays in getting parts from the manufacturer
The price of official parts is extremely high

As for requirements of the part itself, the article list four characteristics that a part must have:


The part must be properly designed
The part must be produced to conform to the design
The part's production must be properly documented
The part must be properly maintained


The owner must be involved in the production but doesn't actually have to do the manufacturing himself:

The aircraft owner must participate in the manufacture of the part
in at least one of five ways for it to be considered an Owner Produced
Part.

The owner provides the manufacturer of the part with the design or performance data.
The owner provides the manufacturer of the part with the materials.
The owner provides the manufacturer with fabrication processes or assembly methods.
The owner provides the manufacturer of the part with quality control procedures.
The owner personally supervises the manufacture of the new part.


More recently, in the September 2014 edition of the Cessna Pilots Association magazine, Mike Busch has an article on replacement parts that calls the current regulations on owner produced parts &quot;extremely liberal&quot;:

“Owner-produced parts” do not require a  PMA. These are parts produced
by an aircraft  owner for use on his own aircraft, and not  offered
for sale. There is an FAA letter of  interpretation that sets forth
precisely what  an owner's involvement must be to qualify a  part as
“owner-produced,” and it is extremely  liberal. The owner need not
actually  manufacture the part himself, so long as  he provides
specifications or materials  or supervision or some other meaningful
participation in the part's production.

Unfortunately, he didn't mention exactly which letter of interpretation covers these parts but the FAA magazine article refers to an &quot;FAA Memorandum dated
August 5, 1993&quot; and I guess it's probably the same one. I wasn't able to find it on the FAA site.