It refers to a guy's external organs of reproduction. The answer should therefore be based on whether or not they are comfortably positioned in the undergarments.
"How's it hanging?"
"I'm fine, thanks! I just got out of the closet, finally I can express my true self instead of living a lie!"
or
"How's it hanging?"
"Long and loose and full of juice!"
1) A casual greeting used by an individual or group or individuals addressing an other individual (or group or individuals). Often used instead of or in conjunction with (following) word such as hello, hi or hey
It should be noted that this phrase is not only used in by english speakers of all nationalities and dialects but by speakers of many different languages across the globe
Jim just gets up in the morning, walks into the kitchen to see his roomate there sipping his Tim Horton's double double coffee.
"How's it going eh?" Queries Jim, formalizing the conversation between them and fulfilling any requisites to speak with non-monosyllables.
Doug, the roomate, grunts in acknowledgement, then pours more coffee and bites his kruller from Tim Horton's, it's all about the tractor wheel eh.
How's it hangin is a polite greeting from one man to another. "It", in the context, is the man's penis. Presumably if it's hanging well, the man is doing well.
Jerry: Hey John, how's it hangin?
John: Long and low, Jerry, long and low!
Jerry: that's great!