If you’re on macOS then I would recommend going to Preferences » Advanced and disabling then re-enabling “Faster Docker Volumes”. Doing that will refresh the file system mounts.
Then, you can try creating the site again. If it fails, please provide your log file by going to Help » Reveal Local’s Log.
I can confirm that it’s possible to install and run a site off an external drive. Unfortunately it’s not working on my main machine which is driving me nuts. Thanks anyway.