Per MSDN Docs: http://msdn.microsoft.com/en-us/library/hh510202.aspx
LocalDB supports two kinds of instances: Automatic instances and Named instances.
I had the same issue. I resolved it by deleting and recreating the instance from command line:
The new instance allows auto creation, and solves the issue.
The solution was taken from: http://answers.flyppdevportal.com/categories/sqlserver/sqlexpress.aspx?ID=8bcb5f1e-0240-4df3-8a5e-7e3e73e1c45b