When setting the -homedirectory switch on a user through Powershell the directory is not created.
Use this code to create the folder and apply the necessary ACLs:

    if ( !(Test-Path -Path "$homedir$userprincipalname" -PathType Container) ) {
         ## Doesn't exist so create it.
         Write-Host "home directory doesn't exist. Creating home directory."

         ## Create the directory
         New-Item -path $homedir -Name $userprincipalname -ItemType Directory
         $userDir = "$homedir$userprincipalname"

         ## Modify  Permissions on homedir
         $Rights= [System.Security.AccessControl.FileSystemRights]::Read -bor [System.Security.AccessControl.FileSystemRights]::Write -bor [System.Security.AccessControl.FileSystemRights]::Modify -bor [System.Security.AccessControl.FileSystemRights]::FullControl
         $Inherit=[System.Security.AccessControl.InheritanceFlags]::ContainerInherit -bor [System.Security.AccessControl.InheritanceFlags]::ObjectInherit
         $Propogation=[System.Security.AccessControl.PropagationFlags]::None
         $Access=[System.Security.AccessControl.AccessControlType]::Allow
         $AccessRule = new-object System.Security.AccessControl.FileSystemAccessRule("$userprincipalname",$Rights,$Inherit,$Propogation,$Access)
         $ACL = Get-Acl $userDir
         $ACL.AddAccessRule($AccessRule)
         $Account = new-object system.security.principal.ntaccount($userprincipalname)
         $ACL.setowner($Account)
         $ACL.SetAccessRule($AccessRule)
         Set-Acl $userDir $ACL
    }

Thank you very much for this tip Shay Levy!