Make 7-Zip extract an archive directly to a directory

Solution 1:

Doh! I really should have looked harder for an answer.

From the 7-Zip FAQ:

Why does drag-and-drop archive extraction from 7-Zip to Explorer use temp files?

7-Zip doesn't know folder path of drop target. Only Windows Explorer knows exact drop target. And Windows Explorer needs files (drag source) as decompressed files on disk. So 7-Zip extracts files from archive to temp folder and then 7-Zip notifies Windows Explorer about paths of these temp files. Then Windows Explorer copies these files to drop target folder.

To avoid temp file usage, you can use Extract command of 7-Zip or drag-and-drop from 7-Zip to 7-Zip.

Solution 2:

You can press F9 inside 7-Zip, you'll get two panes. In the first you navigate to the archive you want to extract, and in the second you navigate to the folder where you want your files extracted. This will skip the temp folder step.