It's normal to lose a lot of weight at the beginning of a new diet, and you are right that it's mostly water. Most of us will lose around 2 pounds of fat per week, so the rest is probably water. Keep in mind that to lose one pound of
fat, you have to burn 3,500 more calories than you consume. It will taper off soon and you'll probably notice a loss of between 1 and 3 pounds per week thereafter.
Congrats on making such a great start on your diet, it sounds like you've chosen a very reasonable plan that you can live with