systemd version the issue has been seen with

245->246.5

Used distribution

Arch Linux

Expected behaviour you didn't see

homectl didn't create user home directory on a usb like it does with luks storage type

Unexpected behaviour you saw

homectl failed with unrelated error message

Steps to reproduce the problem
homectl create wally3 --storage=directory --image-path=/dev/disk/by-id/usb-090c_1000_11102555002093-0:0
🔐 Please enter new password for user wally3: ********
🔐 Please enter new password for user wally3 (repeat): ********
Operation on home wally3 failed: Home of user wally3 already exists.