Welcome to racing, Sodapedaler!
You might want to check out the race forum too. There are a lot of really experienced racers who post there and a lot of good advice to be gleaned.
Yes, your observations seem right.
1) and 2) Late in the season, even the lower categories will be fast, and you may have been doomed from the start. It's also possible you would have been doomed in the Cat 5 race too. It's just something you have to experience for yourself. The good news is that you made the leap from rider to racer; you have a race under your belt and you have some information about where you need to improve for next season.
3) Maybe. It's possible it's just because it's a late season race. Racers started racing that category early in the season as 5's, got their 10 races and upgraded, but kept signing up for that category. Also, you might have guys who have the points to upgrade to Cat 3, but they want to stay 4 in order to help teammates get their points too.
4) Masters racing is tougher than most non-racers realize, even in the 4's and 5's. It's even worse in the M123. I always find the 45+ race harder than the E3 race. Much harder. So, you might find it easier to race the E5 race; plus you'll often have mentoring.
A couple of thoughts: Keep working on bike handling and racing in a pack. If you're not already doing this, find the gnarliest Saturday race ride and do what's necessary to hang on as long as possible. If and when you get dropped, tempo ride back home and call it a good workout. Next week, hang on a little longer.
While you're on those race rides, talk to guys on a team and see if they're taking new riders. Getting on a team gets you plugged into a group of training partners, etc.
Try to do the Early Birds in Fremont in January. Those are excellent for new racers. Highly recommended.