It looks like you found a very specific bug. If there are existing homework sets in the course but you don't select one, you get the helpful message "You need to pick a target set above so we know what set to which we should add this problem." It's only if you haven't created any homework sets yet that you get the error message that you encountered.
I will file a bug and hopefully this is an easy fix for the next release.
I will file a bug and hopefully this is an easy fix for the next release.