Apparently with an encrypted home directory, one needs to log out and then back in. Now it works.
EDIT: I think the problem is on my laptop. The laptop uses the netbook remix and during install, it offered an encrypted option and I selected the encrypted option. There seems to be some kind of documented problems. Apparently the ~/.ssh is not available until you login, but you need ~/.ssh in order to log in. See my problem?
I went through all of the Ubuntu help documents online and offline and I still don't understand.
I have 2 computers.
A netbook named sandworm, has ssh client and server installed. I use the password gui manager in the menu to create an ssh key, I selected create key only because I'm using thumb drive to move keys around. Sandworm has correct permissions I think. I need to use sandworm to log onto another computer. Sandworm will be the client. Also sandworm has encrypted home directory, but I don't need to login to it from another machine.
A desktop computer named gorilla with ssh client and server installed. Gorilla is the computer I want to log into via ssh. I also created ssh key on this machine as well.
Gorilla sshd_config I set to AllowUsers nate because on gorilla my user account is nate.
Both of them have key based login only. Where do I put the pub key and which machine. Do I copy and paste pub key into authorized_keys? I tried pasting the sandworm pub key into gorilla authorized_keys file, did not work and I tried in reverse. What do I do on each machine.