Blanche needs to modify reality in several ways. When she makes her lantern by covering a stark light bulb with coloured paper, it's not only to soften up the light in the room (to make it more homey and romantic-looking) but also to dissimulate her age.
Blanche also needs to revamp her past. As Mitch is showing an interest in her, she is afraid he will find out about that sordid chapter in her life when she worked as a call girl. Stanley finds out about this and threatens to tell. Another incident - when she was much younger, Blanche's husband committed suicide when she found out about his homosexual affair and rejected him, a tragedy for which she felt partially responsible.
Blanche has a hard time accepting these events in her life and tries to substitute truth with illusion. Given these circumstances and her own fragile nature, it is easy to understand why Blanche wants and needs "magic" instead of "realism."
Blanche means in this utterance she has seen too much of the brutal realities of life: her husband's suicide over his homosexuality, her own poverty and prostitution, and behind that the fading of the Old South and what seems to her to have been a gentler, more protected way of life. She is also aging and her options narrowing. Reality means facing that the world is a cold, cruel place; that she is an aging woman with few prospects, no money and a past that works against her; and that, rather than protect her in her vulnerability, people like Stanley will hurt her. In the real world, Blanche has little to fall back on—but then there is the world of poetry—magic and dreams, soft lights and illusions—which she hopes to use to create a new reality for herself, softer and more muted than what is. In the end, however, poetry and magic can't be reconciled with reality and she can only descend into madness.