Earthquakes radiate from slip on discrete faults, but also commonly involve distributed deformation within a broader fault zone, especially near the surface. Variations in rock strain during an earthquake are caused by heterogeneity in the elastic stress before the earthquake, by variable material properties and geometry of the fault zones, and by dynamic processes during the rupture. Stress changes due to the earthquake slip, both dynamic and static, have long been thought to cause dilatancy in the fault zone that recovers after the earthquake. Decreases in the velocity of seismic waves passing through the fault zone due to coseismic dilatancy have been observed followed by postseismic seismic velocity increases during healing. Dilatancy and its recovery have not previously been observed geodetically. Here we use interferometric analysis of synthetic aperture radar images to measure postseismic surface deformation after the 2003 Bam, Iran, earthquake and show reversal of coseismic dilatancy in the shallow fault zone that causes subsidence of the surface. This compaction of the fault zone is directly above the patch of greatest coseismic slip at depth. The dilatancy and compaction probably reflects distributed shear and damage to the material during the earthquake that heals afterwards. Coseismic and postseismic deformation spread through a fault zone volume may resolve the paradox of shallow slip deficits for some strike-slip fault ruptures.