This is for future me, or anyone that needs it.
If you:
- have a Mac
- want to run Houdini and Unreal 5 together
- have Houdini on an external drive

you need to select the libraries folder.
/Volumes/1TB Unreal Engine/Houdini/Houdini20.5.410/Frameworks/Houdini.framework/Versions/20.5/Libraries