They've always been a popular toy that captured the imagination since the beginning of trains. Once Christmas evolved into the modern gift giving holiday, then many bought this toy or remembered trains with nostalgia from their childhoods. Add to that the little trains that are just the right size for the tracks to go round the Christmas tree, thus making them standard decor for some families. When they don't do that, they can always be a single engine ornament hanging from the tree. Trains might also represent arriving relatives & soldiers coming home for Christmas.
Our own family Christmas photos include ones of my brother & I standing over the tracks of his windup train. It was red metal enamel with a little wisp of smoke coming from the piece of flint in the engine. It included passenger car, coal car, oil tanker, & caboose. Winding it up made it go around a few times, watched closely by the family cat. There I am in my little print dress of around 1950 with the red wool felt embroidered Dutch hat that I hardly ever took off. In another, there's my brother, wearing a cowboy hat & probably wishing for an electric train. Ah, well. Where would he have put it?
In some cities, like San Francisco, city street cars & cable cars are turned into little decorated ornaments as a part of Christmas shopping in the city. There are also full size street cars used in Christmas parades in Northern California. In some towns, Santa arrives by street car. In others, Santa arrives by boat, coming down the river. In the bay area, Santa might even come in by ferry. No doubt, somebody has probably made a UFO for your tree, too. However, for those who like to keep Christmas as old-fashioned & full of nostalgia, they're going to hang onto the idea of Santa riding in by either by sleigh or by train.