I’ve been around quite a few years and never heard of a “water head” in that context. We’ve heard of “water on the brain” from the ‘70s and before, but that was only an old slang for the condition and wasn’t considered to be a joke. Where did Leno come up with that? ...something from his neighborhood, perhaps?
Water head was a common term for the condition when I was a child, back in the late 1940s. I heard it used quite frequently because a distant relative had a “water head” baby.