Software buttons are context sensitive, so applications can use the whole screen if need be and they can move around the screen based on orientation of the phone.
Hardware buttons are always just sitting there in the way.
I was checking out some of the apps I use, and a lot, if not most of em was not able to utilize the software buttons area making it a true "full" 4.7" screen. Youtube, chrome, a few games, etc was not able to utilize that software button area. I'm sure it could be done, but so far it's not mainstream, especially when only Nexus (correct me if I'm wrong) devices uses onscreen buttons.
Hardware/capacitive buttons are not in the way. They are in a designated area that is not part of the screen. If anything, software buttons are the ones that are in the way because they are almost always on the screen. Example, you can turn off the lights completely for capactive buttons making them "invisible," whereas for the Nexus, the most I've been able to make it "invisible" is in camera mode where those buttons turn into little dots.
And I mentioned in my first post why I like software buttons on the Nexus. It moving around based on orientation of the phone is a nice touch. I wish more phones were like this, but it must not take up the usable space on the screen. If the Nexus 4 was advertised as 4.5" usable screen, then there would be no complaints from me at all. But it stating it as 4.7" is a bit misleading.