It's not common--I might hear it four times a year or so. It is a joke. When someone asks, "what's up?", they are asking "how are you?" or "what has been happening recently?" However, the person who answers pretends to misunderstand the question as "what is above my head?". So, they answer "The sky is above your head."

Yup. But more like four times in a decade. I remember kids saying that in grade school...