Your configured failover capacity is set to 1, so you basically cannot allocate more resources than what ONE host owns.If this host goes down, the other one will have to host all your VMs with its resources. You cannot set it the failover to 2 because you do not have 2 hosts to failover to since you only have a total of 2 hosts. That is why you are getting the error.
Distribute the resources of one host, then you can set the failover capacity to 1 without getting an error. I would consider adding more hosts though.