I managed to figure it out. The hip clothifies well in the cloth room.

Apparently the problem has to do with the fact that I had used Wardrobe Wizard 2.0 to convert the dress to fit the morphed V4.1 figure, before running it through the cloth room to clothify the hip.  I followed  Phil's video for full body morphs, but some more steps  must be needed or something.

I just did it again, but this time I used Wardrobe Wizard 1 to convert the dress,  and toggled the spherical fall off zones for the hip in order to keep the morphs and body handles (just in case I needed them). After doing that I ran it through the cloth room and the skirt moved properly.

Anyway, I'm glad that the skirt can be clothified! I love the MFD even more since I learned that it can be :)

"It is good to see ourselves as others see us. Try as we may, we are never
able to know ourselves fully as we are, especially the evil side of us.
This we can do only if we are not angry with our critics but will take in good
heart whatever they might have to say." - Ghandi