I think it's hardware, the severity depends on your touch firmware (which I suggest you experiment with) and your eye for details. Mine works fine for the most part, sometimes it doesn't realize I lifted my finger off the screen but it's not a deal breaker. I still think it's pretty unacceptable, after years of capacitive touchscreens, I expect them to be flawless by now.
iPhone 3GS -> iPhone 4 -> Galaxy S2 -> iPhone 4S -> Galaxy Nexus -> Galaxy Note 2 -> iPhone 5 -> iPhone 5S
Nexus 7 WiFi - Stock KitKat