At the risk of playing devil's advocate, I would argue that giving candidates the ability to use virtually any language or framework and develop on localhost is not necessarily an advantage.

When I'm looking to hire a Rails dev then I want to know as soon as possible in the interview process that they actually know some of the basics of Rails and MVC - not just if they can build a web app. Furthermore, by hiding the candidate's choice of language/framework (and code quality) behind localhost the benefits of assigning an arbitrary coding challenge are lost. I fear that the only solution would be for the candidate to submit the full source code.

However, as a very quick "can this candidate actually write code" filter, I think you're well on track.