This sounds like expected behaviour to me -- the login password is used
to encrypt the filesystem key. Without a login password at login time,
the files should be unavailable, and thus there's no home directory to
contain anything of value for the user.

There might be a better way to tell the user that a password is required
for encrypted home directories though.

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https://bugs.launchpad.net/bugs/1318030

Title:
  Cannot login-without-password when home folder in encrypted

Status in “gnome-control-center” package in Ubuntu:
  New

Bug description:
  Users of which the home folder is encrypted using the CLI
  (unfortunately there is no GUI option for this, see
  https://bugs.launchpad.net/ubuntu/+source/gnome-control-
  center/+bug/1279766), and for which the 'login without password' is
  set, cannot login.

  Steps to reproduce:
  1. Using an Administrator account, create a new user in System Settings > 
User Accounts and set a password.
  2. Open a shell and encrypt the newly created user folder by 'sudo 
ecryptfs-migrate-home -u <username>'
  3. Login into the new account: successful
  4. Logout and login into the Administrator account and select 'Login without 
password' for the newly created user.
  5. Login into the new account: cannot login (the password field for this 
users now displays 'Log in' but trying to login results in a flickering screen 
and back to the login screen.

  Ubuntu 14.04 x64 (reproducable on two different machines)

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