The localhost is the computer that you are using. For example if you are connected to a network within your home that has 3 computers on that network but your computer is the computer that is considered the administrative computer that computer is considered the local host.
Another example is an administrator that starts his/her computer to start up a webserver from his/her computer then uses a remote access program to start another computer and run programs from that computer.
The original computer that the administrator started up would be the local host.
The other computer or computers that the administrator was servicing or using to run different programs would be identified by their individual IP address, but the local host would be identified by the loopback address 127.0.0.1.
All of the results or information requested by the administrator from the other computer or computers would be then looped back to that localhost computer where the administrator could perform the required duties or updates.
For a real simple example, if you turn on your computer to use the web browser, that computer would be the local host computer.