Okay, I've done some digging around.

My system: SQL 2008 named instance (no default instance). Changed DefaultData set to "C:\SQLData". Verified that it was set by viewing in the "Running Values"

Using Process Monitor, I set a filter to show any access to a registry key ending with "DefaultData".

I then performed the create database script that Carl posted.

There were no hits on this registry key. Database was created in the directory with the master database.

I then restarted the sql services. As it was restarting, there was one hit on a registry key ending with "DefaultData", for the proper key for this instance. I then performed the create database script again. This time, the database was created in the C:\SQLData directory. No additional hits on registry keys ending with "DefaultData"

So, it appears that after setting this registry value, that the sql services must be restarted for it to be recognized. It seems to me that this would be a very minor thing to have the CREATE DATABASE statement read the registry value for this instance if a specific path was not specified.