Despite their success in image generation, diffusion models can memorize training data, raising serious privacy and copyright concerns. Although prior work has sought to characterize, detect, and mitigate memorization, the fundamental question of why and how it occurs remains unresolved. In this paper, we revisit the diffusion and denoising process and analyze latent space dynamics to address the question: "How do diffusion models memorize?" We show that memorization is driven by the overestimation of training samples during early denoising, which reduces diversity, collapses denoising trajectories, and accelerates convergence toward the memorized image. Specifically: (i) memorization cannot be explained by overfitting alone, as training loss is larger under memorization due to classifier-free guidance amplifying predictions and inducing overestimation; (ii) memorized prompts inject training images into noise predictions, forcing latent trajectories to converge and steering denoising toward their paired samples; and (iii) a decomposition of intermediate latents reveals how initial randomness is quickly suppressed and replaced by memorized content, with deviations from the theoretical denoising schedule correlating almost perfectly with memorization severity. Together, these results identify early overestimation as the central underlying mechanism of memorization in diffusion models.