For completeness, my comment probably should have been an answer…
I think this is probably a bug.
It doesn't matter if you create a new location type or use a pre-populated one. The sql has a column that doesn't exists and it's going against the wrong table.
Here's the sql:
SELECT DISTINCT UPPER(LEFT(contact_a.sort_name, 1)) as sort_name
FROM civicrm_contact contact_a
WHERE ( ( LOWER(Home-location_type.name) = '8' ) )
AND (contact_a.is_deleted = 0) GROUP BY contact_a.id
ORDER BY UPPER(LEFT(contact_a.sort_name, 1)) asc
[nativecode=1054 ** Unknown column 'Home-location_type.name' in 'where clause'"
AlanGallery submitted a bug see comment above.