The house you are looking at is certainly an extreme example of difference between assessed value and listing price (which is not necessary market value)! One might suspect the house never changed hands after it was built in 1908 and the owner benefited from Prop 13 later!
Assessed value for a home is used for property tax purposes instead of marketing purposes; which is why they can be quite different.
As mentioned below, Assessed Value is arrived using Purchase price adjusted by property 13 allowable annual increases, adjusted by taxable improvements to the property through the years.
This is why when people are selling or buyer a home, instead of using assessed value or listing price as guidance, a comparable market analysis for similar properties and working knowledge of recent sales of similar properties instead of assessed value is used to help arrive market value for a property.
Hope this helps!