To put things (very) simply; the whole bloody war was over the city or Jerusalem. Many lives were taken, from both sides, in an effort to possess it. In his moment of despair, Balian wonders if this city is worth all those losses, and shares his bewilderment with Saladin. Saladin at first replies "Nothing". Echoing this earlier exchange with Balian:
Balian of Ibelin: Before I lose it, I will burn it to the ground. Your holy places - ours. Every last thing in Jerusalem that drives men
Saladin: I wonder if it would not be better if you did.
The city, as a geographic location, as cold stone, is almost worthless. The rational, secular view.
Then he goes back and smiles and says "Everything!" as there is deeper, more spiritual, value to city. Not only religious, but nationalistic as well. This is the emotional, spiritual view.
This dichotomy is the prevailing conflict that fuels the unrest in the region that continues to this day. I have always noted that among the more moderate people involved in the middle east conflict that there is always this struggle in their mind. Is this piece of land worth all the anguish?