Instructor pilot with trainee reported the aircraft had descended well below pattern altitude before the instructor realized the situation. The instructor reported complacency was a factor.

Narrative

My student and I were returning to LAF from a night training flight. We were on an extended final for Runway 10 and my student decreased throttle with the intention of slowing down to not get close to the traffic in front of us. However; the plane was trimmed for cruise and we didn't retrim; so we began unintentionally descending. I was focused on the other traffic and making radio calls and didn't catch this. We went from pattern altitude (1600 MSL) to 1060 MSL in about a minute (airport elevation is 606); and we should've been around 1300 MSL at this point. I told my student to climb and we got back on glidepath when I realized that we were dangerously low. I am a new instructor; my student's previous landing and approach had gone extremely well; and there was a lot of other traffic at the airport. I had grown complacent throughout the flight and this complacency; combined with the distraction of other traffic; led to me recognizing how low we were far too late. I also believe I fell for the black hole illusion; as I was looking outside but failed to immediately recognize how low we had gotten.